Carraro Group Annual Report 2011

Transcription

1 Carraro Group Annual Report 2011

2 Carraro Group Annual Report 2011 DIRECTORS REPORT ON OPERATIONS 1

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4 Contents 6\Letter from the Chairman 9\Directors Report on Operations 11\Ownership Structure 16\Summary Data and Graphs 36\General Data and Comments 116\Consolidated Financial Statements 185\Report of the Board of Statutory Auditors 186\Auditors Report 188\Ordinary Shareholders Meeting

5 4 ANNUAL REPORT 2011

6 Letter from the Chairman DIRECTORS REPORT ON OPERATIONS 5

7 2011 marks another significant step forward on the road to the Group s economic relaunch, in line with the Carraro strategic plan 2.0 finalised after the dangerous downturn in industrial activities with the outbreak of the world economic crisis in 2009, preceded by the unprecedented collapses in the finance sector already in the summer of Today turnover, at million euros, is almost back to the record of that year and economic data are acquiring solidity, after all on the path towards break even already in Even if they cannot yet satisfy more challenging expectations, as the Group s activities deserve and which we consider achievable in line with the aforementioned relaunch plan. There is, nevertheless, a return to profit of 5 million euros, little more than symbolic as a figure but certainly significant in the light of prior collapses. Unlike last year, the influence of Santerno has diminished significantly, due to the confused times being experienced in the renewable energy sector, but the other Group companies, not yet all, operating in the core business are already contributing positively to the result. All, however, on the road to recovery, confirming the validity of actions put in place, from which we expect, in the short term, more significant progress and adequate returns. These then are my brief considerations on 2011 performance, whose data are analysed in detail in the Management Report and Notes to the Accounts. But today this is my last letter as Chairman which, however, I do not want to dedicate to distant memories. I will limit myself to touch on the main points of Carraro development over the many decades under my Chairmanship. Fifty years of growth, not without obstacles and turmoil, including the economic earthquake which devastated the worldwide tractor panorama in the 70 s and which led us to the idea of producing four-wheel drive components for tractors which, following Italy, worldwide manufacturers were becoming interested in. Renault, Ford and Case were the first customers. An opportunity that arose from the crisis through the propensity to change, focus on innovation, determination in identifying and applying existing skills, the will shared by management and workforce alike to face new challenges. Hence the small tractor factory was to become a major international group in the transmission sector. It is a memory which perfectly fits the situation we find ourselves in today, a more vast and complex crisis which, before the manufacturing sector, affects entire economic systems in the emergence of potential destined to radically change the world scenario as we know it. From the industrial upheaval of 2009, the transition towards a new economic era and the different development paths which will ensue needs to be understood. Carraro 2.0 is the answer to this, pointing towards industrial strategies aimed at integrating internationalisation processes already underway, with an approach destined to facilitate penetration of world markets in correspondence with the momentous transformations which vast areas of the planet are undergoing. It is crucial to occupy strategic production areas in the countries involved in this transition, in the evolutionary direction which Carraro is about to embark on, in order to continue 6 ANNUAL REPORT 2011

8 being a protagonist in Europe, from Italy, in the industry of the future. In addition to this, increased profitability can and must make a contribution. In a moment of perverse financial crisis such as that the world is currently experiencing, tools must be found and actions promoted to help improve performance in concrete terms. The concrete commitment of the entire management is required to meet the expectations of investors and create investment resources which the vocation for continued growth requires. I leave the Chairmanship of the company today without melancholy. With a delay with respect to a prior decision due to the dramatic impending crisis. I leave now with the tranquillity of knowing that the values developed and shared with those who have collaborated in past decades and those who are called to work in the future have been acknowledged. Spirit of Accountability, Creation of Value, Development of Talent, Stimulation of Innovation, Working Together. These are the values which in a recent campaign all Group employees, at whatever latitude, were asked to share. It is important that these deeply represent the spirit, above all, of those who will lead and those who will work in the future management, in an era, I repeat, of radical transformation. Not to mention the continuous and unrenounceable effort in terms of manufacturing evolution towards an increasingly higher level of technology via an increased and concrete commitment to research and innovation; obsessive observance of the principles of quality in products and in services; open cooperation with customers, encouraging genuine business partnerships; identification of favourable sources of supply in a loyal and continuous partnership with suppliers. All this starting with respect for and improvement of the conditions of workers in an operation which builds on skills at all levels, having merit as a principle in the assessment and growth of responsibility to be rewarded. I have so many other things on my mind. But a letter is a letter. I still have years to witness the strengthening and development of a Group that I feel destined to achieve new records in the still not easy competition that awaits it. My greetings to you all. MARIO CARRARO Chairman LETTER FROM THE CHAIRMAN 7

9 8 ANNUAL REPORT 2011

10 Directors Report on Operations at December 31, 2011 DIRECTORS REPORT ON OPERATIONS 9

11 OWNERSHIP STRUCTURE CARRARO SPA AT 31 DECEMBER 2011 Board of Directors In office until approval of the 2011 Financial Statements (Appointed, General Meeting 23/04/2009 Powers conferred, Board resolutions 07/05/2009 and 04/08/2009) Mario Carraro Chairman Enrico Carraro 2/3 Deputy Chairman Alexander Bossard 3 Chief Executive Officer Anna Maria Artoni 1/4 Director Arnaldo Camuffo 1/2/4 Director Francesco Carraro Director Tomaso Carraro 3 Director Antonio Cortellazzo 1/2/4 Director Pietro Guindani 2/3/4 Director Marco Milani 2/3/4 Director 1 Members of the Internal Auditing Committee 2 Members of the Human Resources and Remuneration Committee 3 Members of the Strategic Operational Committee 4 Independent directors Board of Statutory Auditors In office until approval of the 2011 Financial Statements (Appointed, General Meeting 23/04/2009) Luigi Basso Chairman Saverio Bozzolan Regular Auditor Roberto Saccomani Regular Auditor Silvano Corbella Alternate Auditor Marina Manna Alternate Auditor Auditing Company From 2007 to 2015 PricewaterhouseCoopers Spa Parent Company Finaid Spa Under the terms and for the purposes of Consob Communication no of 20 February 1997, we state that: the Chairman Mr Mario Carraro, the Deputy Chairman Mr Enrico Carraro and the Chief Executive Officer Mr Alexander Bossard have been given severally powers of legal representation and use of the corporate signature in relations with third parties and in legal actions; they carry on their work within the limits of the powers conferred on them by the Board of Directors at the meetings on 7 May 2009 and 4 August 2009, in accordance with the applicable legal constraints, in terms of matters which cannot be delegated by the Board of Directors and of responsibilities reserved for the Board itself, as well as of the principles and limits provided for in the Company s Code of Conduct. 10 ANNUAL REPORT 2011

12 OWNERSHIP STRUCTURE CARRARO SPA FROM 20 APRIL 2012 Board of Directors In office until approval of the 2014 financial statements (Appointments, Shareholders Meeting of 20/04/2012) Enrico Carraro 2 Chairman Tomaso Carraro Deputy Chairman Alexander Bossard Chief Executive Officer Arnaldo Camuffo 1/2/3 Director Francesco Carraro Director Antonio Cortellazzo 1/2/3 Director Gabriele del Torchio 3 Director Marina Pittini 1/2/3 Director Marco Reboa 1/3 Director Board of Statutory Auditors In office until approval of the 2014 financial statements (Appointments, Shareholders Meeting of 20/04/2012) Roberto Saccomani Chairman Saverio Bozzolan Regular Auditor Marina Manna Regular Auditor Barbara Cantoni Alternate Auditor Stefania Centorbi Alternate Auditor Independent Auditors PricewaterhouseCoopers Spa Parent Company Finaid Spa 1 Members of the Internal Control Committee 2 Members of the Human Resources and Remuneration Committee 3 Independent Directors Under the terms and for the purposes of Consob Communication no of 20 February 1997, we state that: The Chairman Enrico Carraro and the Chief Executive Officer Alexander Bossard are severally vested with legal representation and power of signature of the company before third parties and in court; they carry out their work within the limits of the powers conferred on them by the Board of Directors in the meeting of 20 April 2012, in accordance with applicable legal constraints, in terms of matters which cannot be delegated by the Board of Directors and of responsibilities reserved for the Board itself, as well as the principles and limits provided for in the Company s Code of Conduct. Carraro Spa Headquarters Via Olmo, Campodarsego (Padova), Italy P F [email protected] Share Capital Euro 23,914,696 fully paid-up Tax Code/VAT No. and Padua Register of Companies No Padua REA No DISCLAIMER This document contains forward-looking statements, in particular in the section «Business outlook for the current year», in relation to future events and the operating, economic and financial results of the Carraro Group. These forecasts have by their very nature a component of risk and uncertainty, as they depend on the occurrence of future events and developments. The actual results may differ, even significantly, from those announced in relation to a multiplicity of factors. OWNERSHIP STRUCTURE 11

13 Santerno Inc. Zao Santerno 100% Elettronica Santerno España Sl Energy Engineering Srl 100% 100% 100% 99.66% 100% Elettronica Santerno Spa 67% 33% MG Shangai Trad Ltd Eletronica Santerno Industria e Comercio Ltda 0.34% Friulia 67% Minigears Property Turbo Gears India Pvt Ltd % % 17.02% 82.98% Siap Spa 45.60% 100% 100% 100% 33% 28.22% Gear World North America Llc Minigears Inc. 100% Minigears Spa 26.18% Gear World Spa Minigears Suzhou Co. Ltd. GE Capital 12 ANNUAL REPORT 2011

14 100% Soci locali O&K Antriebstechnik Gmbh & Co. KG Carraro North America Inc. Carraro India Pvt Ltd. Carraro Deutschland Gmbh 10.12% % Fon Sa % 100% 100% 100% 100% Carraro Drive Tech Spa Carraro China Drives Syst Co. Ltd. 100% 45.84% % Carraro Argentina Sa 99.90% % Carraro Spa Gerardo E. Francia 44.04% Carraro Drive Tech do Brasil Inc. 0.10% J.V. Locateli 1% 99% 100% Carraro Technologies Ltd. Carraro International Spa Carraro Finance Ltd. OWNERSHIP STRUCTURE 13

15 14 ANNUAL REPORT 2011

16 Summary Data and Graphs 2010/2011 SUMMARY DATA AND GRAPHS 15

17 Summary Data and Graphs 2010 Net revenues 717,748 Operating income 14,654 Net income - 7,228 Net of minority interests Shareholders equity 89,444 Net of minority interests e 77,442 Cash Flow 27,562 ROE Net income/equity % ROI 1.94 % Operating income/invested capital Gross investments 19,555 Share Performance Workforce at 31/12 4,014 R&D 15,948 FTE e 1,981 R&D/Sales 2.22 % max med min ANNUAL REPORT 2011

18 Net revenues ,192 Operating income 31,622 Net income 5,036 Net of minority interests Shareholders equity 89,683 Net of minority interests e 77,915 Cash Flow 37,430 ROE 9.21 % Net income/equity ROI 5.06 % Operating income/invested capital Gross investments 29,211 Share Performance Workforce at 31/12 4,430 R&D 18,168 FTE e 2,010 R&D/Sales 2.0 % max med min SUMMARY DATA AND GRAPHS 17

19 Consolidated Sales Revenues , , ,192 Consolidated EBIT , , ,622 Consolidated Net Income , , , ANNUAL REPORT 2011

20 Consolidated Equity Structure 2009 Uses Sources Fixed assets 351,341 Working capital 256,297 Liquidity 54,711 Shareholders equity 96,619 Sever, Indem 21,576 M/L terms payables 38,675 Short-term payables 505,479 Fixed assets 342,107 Working capital 367,519 Liquidity 44, Uses Sources Shareholders equity 89,444 Sever, Indem 19,364 M/L terms payables 185,263 Short-term payables 460,495 Fixed assets 329,643 Working capital 403,579 Liquidity 100, Uses Sources Shareholders equity 89,683 Sever, Indem 16,978 M/L terms payables 173,919 Short-term payables 553,083 SUMMARY DATA AND GRAPHS 19

21 Consolidated Cash Flow , , ,943 Consolidated Net Financial position (debt balance) , , , ANNUAL REPORT 2011

22 Carraro Group Investments (gross of revenues from disposals) , , ,211 Carraro Group Research and Innovation Expenditure , , ,168 SUMMARY DATA AND GRAPHS 21

23 Breakdown by Sector of Application Construction Equipment 36 % 30 % Agriculture 33 % 32 % Renewable Energies 13 % 19 % Gardening & Power Tools 4 % 5 % Automotive 4 % 5 % Industrial 2 % 3 % Material Handling 3 % 3 % Other 4 % 4 % Turnover calculated on the total number of third party customers (excluding inter-company) 22 ANNUAL REPORT 2011

24 Breakdown by Business Unit Drivelines 63.8 % Components 13.9 % Electronics 13.1 % Vehicles 9.2 % SUMMARY DATA AND GRAPHS 23

25 Main Markets North America 10.0 % 9.1 % Total Export 77.1 % South America 8.2 % 8.3 % 70.6 % Others EU 6.1 % 6.1 % Others extra EU 11.7 % 9.3 % 24 ANNUAL REPORT 2011

26 UK 8,0 % 6,9 % Germany 13.3 % 13.9 % Poland 1.8 % 1.5 % India 5.4 % 4.5 % China 6.8 % 6.7 % France 5.5 % 4.3 % Italy 22.9 % 29.4 % Legenda SUMMARY DATA AND GRAPHS 25

27 Carraro Group Workforce Breakdown Italy Carraro Agritalia Rovigo 75/175 70/154 Carraro Drive Tech Rovigo 30/2 25/4 Total Italy 717/1, /1,280 Legenda Executives Senior Managers Employees Workers ANNUAL REPORT 2010

28 Gear World Padova Siap Maniago 53/281 54/287 Carraro Drive Tech Gorizia 9/57 13/86 Carraro Drive Tech Campodarsego 178/ /380 Carraro Spa [HQ] Campodarsego 73/2 64/2 mini Gears Padova 52/256 58/268 mini Gears Poggiofiorito 14/87 15/97 Elettronica Santerno Cambiago 4 3 Elettronica Santerno Castel Guelfo Elettronica Santerno Imola Energy Engineering Imola 2 1/2 DATI E GRAFICI DI SINTESI 27

29 Carraro Group Workforce Breakdown Foreign Countries mini Gears Usa 9/40 12/33 Carraro North America Usa 7 7 Elettronica Santerno Usa 3 Elettronica Santerno Spagna 6 4 Elettronica Santerno Brasile Carraro Argentina Argentina 50/398 53/ ANNUAL REPORT 2011

30 Fabryka Osi Napedowych Polonia 7/1 27/60 Elettronica Santerno Russia 4 3 O&K Antriebstechnik Germania 47/107 44/104 mini Gears Cina 36/318 31/291 Carraro China Drives Syst Cina 63/170 49/146 Carraro Technologies India Carraro India India 81/602 61/304 Turbo Gears India 50/344 31/321 Total Foreign Countries 436/1, /1,648 Legenda Executives Senior Managers Employees Workers SUMMARY DATA AND GRAPHS 29

31 Consolidated Income Statement at 31/12/ /12/11 % 31/12/10 % Changes 31/12/11 31/12/10 Changes 31/12/11 31/12/10 Revenues from sales 924, % 717, % 206, % Purchases of goods and materials (net of changes in inventories) Services and Use of third-party goods and services 554, % 407, % 146, % 169, % 139, % 29, % Personnel costs 136, % 119, % 17, % Amortisation, depreciation and impairment of assets 33, % 36, % 2, % Provisions for risks 7, % 8, % 1, % Other income and expenses 4, % 4, % % Internal construction 3, % 4, % % Operating costs 892, % 703, % 189, % Operating profit/(loss) (Ebit) 31, % 14, % 16, % Income from equity investments 13 1,199 1,186 Other financial income 2, % % 2,013 Financial costs and expenses 16, % 11, % 4,936 Net gains/(losses) on foreign exchange Value adjustments of financial assets Gains/(Losses) on financial assets 2, % % 3, , % 9, % 7, % Profit/(Loss) before taxes 14, % 5, % 9, % Current and deferred income taxes 9, % 16, % 7,018 Net profit/(loss) 5, % 10, % 16, % Profit/(loss) pertaining to minorities Group consolidated profit/ (Loss) % 3, % 3,894 5, % 7, % 12, % Ebitda 64, % 49, % 14, % 30 ANNUAL REPORT 2011

32 Consolidated Statement of Financial Position at 31/12/ /12/11 31/12/10 Property, plant and equipment 211, ,149 Intangible fixed assets 82,100 81,018 Real estate investments Holdings in subsidiaries and associates 167 Financial assets 5,797 3,952 Deferred tax assets 27,515 30,483 Trade receivables and other receivables 1,582 1,630 Non-Current Assets 329, ,107 Closing inventory 197, ,780 Trade receivables and other receivables 201, ,198 Financial assets 4,775 4,541 Cash and cash equivalents 100,441 44,940 Current Assets 504, ,459 Total Assets 833, ,566 Share Capital 23,915 23,915 Reserves 53,411 62,608 Foreign currency translation reserve 4,447 1,853 Net profit/(loss) for the year 5,036 7,228 Minority interests 11,768 12,002 Shareholders Equity 89,683 89,444 Financial liabilities 164, ,821 Trade payables and other payables Deferred tax liabilities 5,387 8,667 Provision for severance indemnity and retirement benefits 16,978 19,364 Provisions for risks and liabilities 3,700 2,442 Non-Current Liabilities 190, ,627 Financial liabilities 194, ,819 Trade payables and other payables 335, ,739 Current taxes payables 9,560 15,571 Provisions for risks and liabilities 13,680 14,366 Current Liabilities 553, ,495 Total Shareholders Equity and Liabilities 833, ,566 SUMMARY DATA AND GRAPHS 31

33 Cash Flow at 31/12/ /12/11 31/12/10 Opening Net Financial Position 271, ,057 Group profit/(loss) 5,036 7,228 Profit/(loss) pertaining to minorities 205 3,689 Amortisation, depreciation and impairment of fixed assets 32,394 34,790 Cash flow before Net Working Capital 37,635 23,873 Change in Net Working Capital 32,298 11,396 Investments in fixed assets 29,211 19,555 Disinvestments in fixed assets 5, Operating Free Cash Flow 46,573 6,105 Other operating flows 19,803 25,202 Other investing flows 2,262 2,913 Change in Share Capital Dividends paid Other equity flows 5,002 3,742 Free Cash Flow 24,030 30,478 Closing Net Financial Position 247, , ANNUAL REPORT 2011

34 Analysis of Net Working Capital at 31/12/ /12/11 31/12/10 Trade Receivables 133, ,397 Inventory 197, ,780 Trade Payables 299, ,018 Net Working Capital (NWC) 31,861 64,159 SUMMARY DATA AND GRAPHS 33

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36 General Data and Comments DIRECTORS REPORT ON OPERATIONS 35

37 General Data and Comments The Carraro Group recorded higher sales volumes in 2011 compared to the previous year and to expectations, benefiting from the consolidation of an internationalisation process which began more than a decade ago, in geographical areas that maintained a good growth trend in The development of new products and forging of new business relations also enabled the Group to increase its market share. All business units contributed to the increase in revenues, to different extents. In particular, the mechanics segment performed well (the Drivelines, Components and Vehicles Business Units), while turnover from the Electronics Business Unit, that had maintained a strong growth trend in the previous year and first part of 2011, decreased in the second half. This was because of uncertainties due to inconsistent developments in regulations governing special tariffs supporting renewable energies on the Italian market. This performance was achieved despite the unstable conditions affecting the global economy and Italian financial market in particular, during the second half of the year. Profitability picked up compared to the previous year. The Drivelines and Components Business Units made a positive contribution, which partially offset the lower margins of the Electronics Business Unit due to the slowdown in demand from the domestic market. Despite achieving positive results, the Drivelines Business Unit was still affected by procurement and logistics problems which were solved in the last part of the year, while the Components Business Unit managed to improve margins thanks to projects to increase production efficiency getting underway. The Group s overall financial debt decreased compared to the previous year, mainly due to actions taken to improve the management of working capital which was particularly evident with the Drivelines and Vehicles Business Units. As regards activities to streamline production, in 2011 the company branch of the Polish subsidiary Fon Sa including the industrial assembly and processing of axles and mechanical components at the Radomsko plant was disposed of, stipulating a supply agreement with the purchaser. As part of the project to streamline the Business Units, the company Carraro Technologies became a part of the Drivelines Business Unit following the sale of the investment held by Carraro Spa and Carraro International Sa to Carraro Drive Tech Spa. Further reorganisation concerned the Drivelines Business Unit, in particular the merger of Carraro PNH Components with Carraro India Pvt Ltd and the liquidation of Carraro Qindao Trading Co Ltd. The operations in question are specifically described in the paragraph «Significant events in financial year 2011»; the economic and financial effects deriving from these operations are detailed in the paragraphs commenting on the performance of the individual Business Units involved. The process to redefine the production footprint, which began in spring 2010, began to produce positive results in 2011, enabling the Group to increase its competitiveness on main reference markets and enter into business agreements with new partners from geographical areas that are expanding considerably. To consolidate these actions and tackle major programmes for growth, investments in internal 36 ANNUAL REPORT 2011

38 production capacity will be needed over the next few years, with a greater make logic, to enable the Group to achieve the profitability objectives of the «Carraro 2.0» development plan. In addition, the consolidation of management systems and processes, which are a key factor for the Group s operating context, led to an investment strategy for the next three years focussed on a new ERP management system. Summary of financial year closed with a turnover of million euro, up 28.8% compared to million euro in Margins were positive although slightly below expectations, affected by a lower demand of the Electronics Business Unit in the second half of the year, and continuing production inefficiencies of the Drivelines Business Unit, in particular at Carraro Argentina and Carraro India. Ebitda and Ebit improved compared to 2010, reaching 64.0 million euro (6.9% of turnover) and 31.6 million euro (3.4% of turnover) respectively. As at 31 December 2011, the Group had realised a profit of 5.0 million euro (0.5% of turnover) compared to a loss of 7.2 million euro (-1.0% of turnover) recorded in The Drivelines and Electronics Business Units contributed in particular to this result. The Components Business Unit, although considerably improving on the loss of the previous year, still recorded a negative result. The net financial position improved gradually, from million euro as at 31 December 2010 to million euro as at 30 June 2011 and million euro as at 31 December The 24 million euro reduction in debt was obtained thanks to the generation of a positive operating free cash flow, mainly due to the change in the net working capital of the Drivelines and Vehicles Business Units, of 27.6 million euro and 12.0 million euro respectively, despite a significant increase in volumes. A part of these generated cash flows was absorbed by investments in assets mainly undertaken by the Drivelines and Components Business Units. As at 31 December 2011, as well as at 30 June 2011, the covenants contractually envisaged for that date were observed. The Group s turnover as at 31 December 2011 amounted to million euro, up 28.8% compared to turnover for 2010, equal to million euro. The following table breaks turnover down by market segment: Turnover SALES SALES TO THIRD PARTIES INTRA-GROUP SALES Diff % Diff % Diff % Drivelines 605, , , , ,409 12, Components 191, , , , ,310 45, Vehicles 89,303 56, ,428 53, ,875 2, Electronics 124, , , , ,817 2, DIRECTORS REPORT ON OPERATIONS 37

39 Non-allocated business Total Segments Intra-group eliminations Consolidated Total SALES SALES TO THIRD PARTIES INTRA-GROUP SALES Diff % Diff % Diff % 28,268 23, , ,679 23, ,040, , , , ,090 85, ,090 85, , , , , ,090 85, The following table breaks down turnover by geographical area: Geographical Area 2011 % 2010 % Difference % Germany 122, , North America 92, , South America 75, , United Kingdom 74, , China 63, , France 51, , India 50, , Switzerland 48, , Turkey 41, , Poland 17, , Sweden 14, , Other non-eu areas 17, , Other EU areas 42, , Total Abroad 712, , Italy 212, , Total 924, , of which: Total EU area 534, , Total non-eu area 389, , The growth in turnover concerned all the Group s main reference geographical areas. In particular, sales increased considerably in North America (+41.3% compared to 2010), Great Britain (+51.9%), France (+66.1%), Turkey (+155.7%), China (+32.4%) and India (52.8%). In these last two areas, higher volumes were achieved because of a growth in demand which the Group was able to meet, mainly through its local production facilities. 38 ANNUAL REPORT 2011

40 Figures as at 31/12/2011. Ebitda and Ebit 31/12/2011 % of turnover 31/12/2010 % of turnover Diff.% Ebitda 1 64, , Ebit 2 31, , Understood as the sum of operating profit/(loss), amortisation, depreciation and impairment of fixed assets. 2 Understood as operating profit/(loss) in the income statement. Ebitda stood at million euro compared to million euro in 2010, accounting for 6.9% of turnover, in line with the previous fiscal year. Business Units in the mechanics segment (the Drivelines, Components and Vehicles Business Units) made a major contribution to this result, which partially offset the lower margins of the Electronics Business Unit due to a slowdown in demand on the Italian market. Ebit was equal to million euro (3.4% of turnover) compared to million euro in the previous year (2.0% of turnover). Figures as at 31/12/2011. Financial expenses 31/12/2011 % of turnover 31/12/2010 % of turnover Diff.% Financial expenses 13, , Despite a lower average financial debt compared to the previous year, financial expenses went up in absolute terms by million euro (+26.5%) compared to 31 December 2010, due to the increase in the cost of money in the eurozone, in line however with 2010 in terms of the percentage accounting for turnover (1.5%). Figures as at 31/12/ /12/2011 % of turnover 31/12/2010 % of turnover Diff.% Exchange differences 2, Exchange differences as at 31 December 2011 were negative by million euro (-0.3% of turnover). In the previous year, exchange differences were positive by 756 thousand euro (0.1% of turnover). The value includes the economic effect of the change in the fair value of derivatives to hedge the exchange risk, equal to million euro as at 31 December Exchange Differences DIRECTORS REPORT ON OPERATIONS 39

41 Net profit/(loss) Figures as at 31/12/ /12/2011 % of turnover 31/12/2010 % of turnover Diff.% Net profit/(loss) 5, , closed with a profit of million euro (0.5% of turnover) up considerably compared to the previous year, which recorded a loss of million euro (-1.0% of turnover). Taxes for the year as at 31 December 2011 amounted to million euro compared to million euro in Although taxes still had a significant impact on earnings before tax, the overall tax rate improved compared to the previous year, thanks to the positive effects of recovering tax losses in some Group companies. Amortisation, Depreciation and Impairment of Assets Figures as at 31/12/2011. Amortisation, Depreciation and Impairment 31/12/2011 % of turnover 31/12/2010 % of turnover Diff.% 32, , Figures as at 31 December 2011 include an impairment of company assets amounting to 267 thousand euro. Investments Figures as at 31/12/ /12/ /12/2010 Investments 29,211 19,555 Investments amounting to million euro were made, compared to million euro in 2010, mainly to develop new projects and maintain the efficiency of existing plants. 40 ANNUAL REPORT 2011

42 In 2011, the Group continued its strategy of investing in constant technological innovation. Expenses for Research and innovation, the purposes and applications of which are commented on in a specific paragraph, amounted in financial year 2011 to million euro, 2.0% of turnover, compared with million euro, representing 2.2% of turnover in Research and Innovation Figures as at 31/12/ /12/ /09/ /06/ /12/2010 Net financial position * 247, , , ,535 Gearing * Understood as the sum of amounts payable to banks, short-, medium- and long-term bonds and loans, net of cash and cash equivalents, negotiable securities and financial receivables. Net financial position and Gearing The net financial position recorded a debt of million euro, with an improvement over the figures of million euro as at 30 June 2011 and million euro as at 30 September If compared with the net financial position as at 31 December 2010, with debt amounting to million euro, the improved performance is mainly due to positive cash flows generated from current operating management of the Drivelines / Drive Tech, Vehicles / Agritalia and Components / Gear World Business Units. The benefit from the disposal of the Polish subsidiary Fon Sa is also included. Gearing (defined as the ratio of net financial position to owners equity) stood at 2.76 as at 31 December 2011 compared with 3.00 as at 30 September and 30 June 2011 and 3.04 as at 31 December The Net Financial Position/Ebitda ratio came out at 3.87 as at 31 December 2011, below the limit set for this financial parameter (covenant) with reference to the date of 31 December 2011 by the Framework Agreement with the lending banks. It is important to note, therefore, that as at 31 December 2011 the covenants contractually envisaged for that date were observed. DIRECTORS REPORT ON OPERATIONS 41

43 PERSONNEL Workforce trend Figures as at 31/12/ /12/ /12/ /12/2009 Executives Clerical staff 1, Factory workers 2,914 2,671 2,466 Temporary workers Total 4,430 4,014 3,612 Group personnel as at 31 December 2011 (including temporary workers, trainees and interim workers), amounted to 4,430 resources compared to 4,014 actually working as at 31 December After defining the restructuring agreements, between the end of 2009 and early 2010, and the consequent lay-off of staff, the recovery of the demand that occurred starting from the second half of 2010 and continuing during the first half of 2011, led to the immediate increase of employee resources through new hiring, particularly in the Asian areas of India and China, but also in units and plants located in the national territory. This led to a net increase of staff of 416 units compared to the number of employees as at 31 December Actions started In Germany, in view of the recovery in demand, it was not necessary to apply the Corporate Plan derived from the agreement signed during 2010, which forecast a further reduction in employees. In Poland, over 50 work contracts were terminated at the same time as production activities stopped. The Performance Management programme (management process to improve individual and team performance) which began in the previous year and is related to the Management Review process (which identifies career and professional development plans to empower key resources), involved over 210 people in 2011, at all Group units and sites where it operates. A managerial training plan was launched to assist these important initiatives, with external, executive coachers providing training in remote sessions at an international level. Training continued in 2011 on the development of specific professional skills, risk management, safety and the environment, the optimisation of production processes as well as economic/financial issues for non-experts. During the second half of the year, a new training programme for managers began, to improve resource management. Work to design the contents and development procedures for redefining the 42 ANNUAL REPORT 2011

44 «Leadership Model» to bring it in line with the new principles of Carraro 2.0. was completed. Risks regarding health and safety at work The group carries out industrial processes that feature mechanical works and the assembly of mechanical components. The risks associated with health and safety in the workplace are those typical of manufacturing. The Italian manufacturing facilities continually monitor compliance with current legislation. The other manufacturing facilities operate in compliance with local requirements while maintaining the standards envisaged by Italian legislation as a reference. Group management is attentive to all efforts to ensure and improve safety in working conditions paying particular attention to situations with a greater degree of risk, also in accordance with Legislative Decree 231/2001. RESEARCH AND INNOVATION In 2011, the Carraro Group kept up activities for continual methodological improvement and for Business Unit innovation and range development, in order to respond adequately to market expectations, also with a time to market logic. Agricultural Drivelines 2011 was a challenging year for agricultural products. Drawings of the new T10 transmission were issued and prototypes were made to plan; functional testing also began. The new T10 has a unique position for Drive Tech in the «standard» or «open field» tractor sector. This market segment is occupied by the world s leading manufacturers with products that are essentially captive (i.e. self-manufactured), and requires the achievement of significant functional and reliable objectives. Drive Tech is tackling this market with a basic entry level mechanical version, but its strategy is to introduce medium- and top-end range products over the next few months, as it has already done with the lower-range T5.5 transmission. The prototyping and validation of the T5.5 Power Management transmission for special applications (e.g.: Claas, MF and JD) was particularly important in Thanks to the development of a drive input power management system, Tier4i engines can be used (these will be mandatory from 2014), without having to resort to new sizes and thus new products. The Decomplexity project, to simplify and standardize the axle range continued and was expanded to include other products, thus reducing the number of codes for each product and simplifying product families. DIRECTORS REPORT ON OPERATIONS 43

45 Construction Equipment New technological lines were identified in 2010 for extreme products in the range, to comply with legal constraints of future years, and achieve a position on a par with the best competitors. Projects for the TLB56 and TLB86 transmissions were developed in 2011, with studies, calculations and simulations, as well as benchmarking with leading competitors. The product contents demonstrate Drive Tech s aim of supplying alternative performance- and cost-driven solutions, which go against the trend of a follower strategy. This can be achieved through structured, technical benchmarking with leading OEMs, which is fundamental to achieve the best compromise between innovation and sustainability. Vehicles In the Vehicles sector, production of a new tractor model with a highly sophisticated Power Reverse transmission began, and a new common rail electronic engine was installed in special tractors for Massey Ferguson. A project to upgrade common rail electronic engines on standard tractors was also developed for Massey Ferguson (Agco). Several projects were launched in 2011 and will end next year. These include in particular the common platform project to bring tractor engines in line with new emission levels for the customers JD and Claas (production start-up scheduled for the end of 2013) and the project for the manufacture of a special RB tractor (lowered version), to work on crops below bowers, which was presented at the 2010 International Exhibition of Agricultural and Gardening Machinery (Eima) and recognised as a «New Technical Product». Power electronics In the Power electronics sector, which has a great potential and is of considerable interest, the process to modernise the product range for industrial applications and develop new basic solutions for renewable energy applications continued, as product modernisation/upgrading is a key strategy for medium-/long-term growth. In particular industrial-themed projects to complete the «690 range» were completed in 2011, while an outdoor skid was developed for the renewable energies sector, as an integrated system for the development of large photovoltaic parks mainly requested on the North American market. Projects to develop integrated storage, off-grid or grid-connected systems were completed. Methodologies As in previous years, Drive Tech s Research and Innovation Centre continued to establish and consolidate internal procedures. The Product Lifecycle Management project has proven to be beneficial in managing application projects and has become essential for sharing priority actions, standardising the company s technical approach and improving customer service. In 2011 Drive Tech s core activities in the design and development of drive systems were closely examined, so as to sum- 44 ANNUAL REPORT 2011

46 marise skills acquired in common procedures for calculations, simulations, design and testing. Partnerships with universities The Group stepped up its partnership with Padua University in 2011, also through work with the Veneto-based group of Confindustria, the Italian Industry Confederation. Two specialised «trainee doctorate» programmes were launched. These will focus on developing new skills over the next three years, on consolidating knowledge of sustainable mobility, hybrid systems and special aspects of Off Highway applications, as well as the capacity to simulate the behaviour of metallic materials that may be obtained in monitored areas. Activities will also concern technological innovation, as well as calculation and simulation systems, to streamline internal validation processes and fine tune responses to a market that is rapidly evolving. Carraro Technologies India As part of the growth strategy outlined in «Carraro 2.0 CTIL new mission», a programme of organisational and training initiatives was launched, with the first results coming to light in «Local to local» projects were set up in India, including the TLB56 transmission project, as well as a Sales department shadowing scheme during visits to customers and support for production sites to analyse zero km anomalies will be a crucial year, when the responsibilities and powers of the Indian development centre will be allocated. A new organisation will be defined, with a world wide engineering Drivelines area, organised by skill sets and no longer by importance, regardless of the site units belong to. DIRECTORS REPORT ON OPERATIONS 45

47 PERFORMANCE OF THE PARENT COMPANY Carraro Spa Carraro Spa is the parent company, with functions of strategic guidance, control and coordination of the individual Business Units of the Carraro Group. The company also has a production site, Divisione Agritalia, based in Rovigo, for the development, manufacture and distribution of agricultural tractors based on agreements with major international manufacturers (Agco, John Deere, Class). In financial year 2011 Carraro Spa achieved revenues from sales of million euro ( million euro as at 31 December 2010), mostly generated by Divisione Agritalia. Ebitda was negative amounting to 555 thousand euro, and accounting for -0.56% of turnover, improving on the negative value of million euro, -7.94% of turnover, of the previous year. Ebit was negative amounting to million euro, accounting for -4.26% of turnover, compared to million euro and % of turnover as at 31 December Carraro Spa is only able to partially charge overheads relating to its position as parent company to individual controlled Business Units. Net financial expenses amount to million euro, accounting for 3.03% of turnover (2.651 million euro, accounting for 4.08% of turnover as at 31 December 2010) while net exchange differences, including hedging costs, were negative by 100 thousand euro (positive by 64 thousand euro as at 31 December 2010). Income from equity investments amounts to million euro (4.500 million euro as at 31 December 2010) and refers to dividends paid in the year by the subsidiaries Carraro International, Elettronica Santerno Spa and Carraro Deutschland GmbH. With taxes receivable amounting to 129 thousand euro (taxes receivable amounted to 943 thousand euro in 2010) 2011 closed with a net profit of million euro (registering a net loss of million euro as at 31 December 2010). In 2011, amortisation and depreciation were equal to million euro in line with the previous fiscal year (3.823 million euro). Gross investments amounted to million euro in 2011 (1.435 million euro as at 31 December 2010) and refer to maintaining facilities at Divisione Agritalia, and to capitalising research and development job orders. The net financial position recorded debt amounting to million euro, compared to debt of million euro as at 31 December The improvement over the previous year is due to the generation of positive cash flows by Divisione Agritalia, made possible by careful business negotiations with main customers to reduce payment times, and to dividends received. The workforce as at 31 December 2011 totalled 325 persons (of which 75 at the holding in Campodarsego and 250 at the Rovigo site of Divisione Agritalia). 46 ANNUAL REPORT 2011

48 A summary of the results of the parent company and the companies it directly controls, not attributable to any of the Business Units, is provided below. Carraro Spa 31/12/2011 % of turn. 31/12/2010 % of turn. Carraro Deutschland GmbH Diff.% 31/12/2011 % of turn. 31/12/ % of turn. Turnover 98,461 64, ,618 n.r. Ebitda , , n.r. Ebit 4, , , n.r. Net profit/(loss) 6, , , n.r. Amortisation, depreciation and impairment Diff.% 3, , n.r. Investments 3,341 1,435 Net financial position Shareholders equity 52,714 70, ,971 76,380 72,377 10,056 12,995 Gearing Economic data of 2010 include the results of the first seven months of the incorporated companies O&K Verwaltung GmbH and O&K Antriebstechnik GmbH & Co KG Carraro International Sa 2 Carraro Finance Lts. 3 31/12/2011 % sul fatt. 31/12/2010 % sul fatt. Diff.% 31/12/2011 % sul fatt. 31/12/2010 % sul fatt. Turnover 21,195 14, n.r. Ebitda 2, , n.r. Ebit 2, , n.r. Net profit/(loss) 4, , n.r. Amortisation, depreciation and impairment Diff.% 2 1 Investments Net financial position Shareholders equity 17,088 18,783 9,044 9,054 46,231 44,801 9,034 9,044 Gearing Based in Luxembourg, the company performs the financial management and treasury functions of the Group and work of a commercial nature on products for the engineering and electronics industries, and provides commercial services in general. 3 The company supports its parent company, Carraro International, in undertaking international financial and treasury work for the benefit of the Group based in Dublin (Ireland). DIRECTORS REPORT ON OPERATIONS 47

49 48 ANNUAL REPORT 2011

50 Performance and Results of the Subholding Companies Business Units DIRECTORS REPORT ON OPERATIONS 49

51 1.3762% % Soci locali Carraro Deutschland Gmbh O&K Antriebstechnik Fon Sa Gmbh & Co. KG Carraro North America Inc % 100% 100% 100% Carraro Drive Tech Spa 100% Carraro India Pvt Ltd. Carraro China Drives Syst Co. Ltd. Carraro Spa 100% 45.84% 44.04% 99.90% 99.94% Carraro Argentina Sa % Gerardo E. Francia 100% Carraro Drive Tech do Brasil Inc. 0.10% J.V. Locateli Carraro International Sa 50 ANNUAL REPORT 2011

52 Business Unit Drivelines Drivetech DIRECTORS REPORT ON OPERATIONS 51

53 Drivelines. Key Sectors Construction Equipment 52,4 % Axles 56% Transmissions 23% Drives 20% Others 1% 52 ANNUAL REPORT 2011

54 Axles and drives, epicycloidal reducers for agricultural and earth movement applications, for forklifts, mining machinery and stationary applications (such as escalators and wind generators) Agricultural Equipment 30,8 % Axles 69% Transmissions 26% Others 5% Other sectors Material Handling Wind Stationary Applications 16,8 % DIRECTORS REPORT ON OPERATIONS 53

55 Summary Data and Graphs Drivelines 2010 Net revenues 427, Net revenues 605,775 Operating income - 3,518 Adjusted Adjusted for the effect of exchange differences Operating income 21,052 for the effect of exchange differences Net income - 13,091 Net Net of minority interests Net income 3,470 of minority interests Shareholders equity 33,332 Net Net of minority interests e 33,340 Shareholders equity 35,005 of minority interests e 35,004 Cash Flow 1,262 Cash Flow 15,414 Gross investments 8,117 Workforce at 31/12 1,961 Gross investments 12,335 Workforce at 31/12 2, ANNUAL REPORT 2011

56 Turnover by Geographical Area Total Foreign Countries 86.9 % 84.6 % Total Italy 13.1 % 15.4 % * 2011 turnover calculated on the total number of third party customers (excluding inter-company) Workforce Breakdown Executives Senior Managers Employees Breakdown by Sector of Application * Construction Eq % 46.8 % Auto & Truck 1.2 % 1.7 % Agriculture 30.8 % 35.8 % Powerstations 0.6 % 1.5 % Spare Parts 8.1 % 8.9 % Workers 1,780 1,474 Material Handling 4.6 % 3.9 % Other 2.3 % 1.4 % DIRECTORS REPORT ON OPERATIONS 55

57 Subconsolidated Income Statement as at 31/12/2011 BU Drivelines / Drivetech 31/12/11 % 31/12/10 % Changes 31/12/11 31/12/10 Changes 31/12/11 31/12/10 Revenues from sales 605, % 427, % 178, % Purchases of goods and materials (net of changes in inventories) Services and Use of thirdparty goods and services 414, % 286, % 128, % 92, % 73, % 18, % Personnel costs 65, % 53, % 12, % Amortisation, depreciation and impairment of assets 12, % 14, % 2, % Provisions for risks 3, % 5, % 2, % Other income and expenses 2, % 2, % % Internal construction % % % Operating costs 584, % 430, % 153, % Operating profit/(loss) (Ebit) Income from equity investments 21, % 3, % 24, % Other financial income % % 126 Financial costs and expenses 10, % 7, % 3,184 Net gains/(losses) on foreign exchange Value adjustments of financial assets Gains/(Losses) on financial assets 1, % % 1, % 0.00% 11, % 6, % 4, % Profit/(Loss) before taxes 9, % 10, % 19, % Current and deferred income taxes 6, % 3, % 3,298 Net profit/(loss) 3, % 13, % 16, % Profit/(loss) pertaining to minorities Business Unit Consolidated profit/(loss) % % 61 3, % 13, % 16, % Ebitda 32, % 10, % 22, % 56 ANNUAL REPORT 2011

58 Subconsolidated Statement Of Financial Position as at 31/12/2011 BU Drivelines / Drivetech 31/12/11 31/12/10 Property, plant and equipment 77,564 84,008 Intangible fixed assets 24,951 24,193 Real estate investments Holdings in subsidiaries and associates 167 Financial assets 4, Deferred tax assets 15,003 17,614 Trade receivables and other receivables 1, Non-Current Assets 123, ,889 Closing inventory 132, ,821 Trade receivables and other receivables 129,309 99,931 Financial assets 2, Cash and cash equivalents 32,123 12,664 Current Assets 296, ,006 Total Assets 419, ,895 Share Capital 23,817 23,817 Reserves 12,560 25,387 Foreign currency translation reserve 4,843 2,773 Net profit/(loss) for the year 3,470 13,091 Minority interests 1 8 Shareholders Equity 35,005 33,332 Financial liabilities 14,045 12,557 Trade payables and other payables Deferred tax liabilities 2,081 2,395 Provision for severance indemnity and retirement benefits 9,615 11,316 Provisions for risks and liabilities 1, Non-Current Liabilities 27,506 27,440 Financial liabilities 120, ,264 Trade payables and other payables 224, ,989 Current taxes payables 6,296 1,827 Provisions for risks and liabilities 6,001 8,043 Current Liabilities 357, ,123 Total Shareholders Equity and Liabilities 419, ,895 DIRECTORS REPORT ON OPERATIONS 57

59 Cash Flow as at 31/12/2011 BU Drivelines / Drivetech 31/12/11 31/12/10 Opening Net Financial Position 124,883 81,099 Group profit/(loss) 3,470 13,091 Profit/(loss) pertaining to minorities Amortisation, depreciation and impairment of fixed assets 11,944 14,353 Cash flow before Net Working Capital 15,395 1,182 Change in Net Working Capital 27,586 14,167 Investments in fixed assets 12,335 8,117 Disinvestments in fixed assets 4, Operating Free Cash Flow 35,566 20,216 Other operating flows 6,096 15,769 Other investing flows 1,322 7,800 Change in Share Capital 26,941 Dividends paid Other equity flows 1,778 26,942 Assets available for sale Free Cash Flow 29,014 43,784 Closing Net Financial Position 95, ,883 Analysis of Net Working Capital as at 31/12/2011 BU Drivelines / Drivetech 31/12/11 31/12/10 Trade Receivables Inventory Trade Payables Net Working Capital (NWC) The Drivelines Business Unit / Drive Tech, which operates in the axles, transmissions and drives sector for construction, mining, agricultural and material handling applications as well as for wind generators, increased turnover in 2011 by 41.71% compared to the previous year, going up from million euro in 2010 to million euro in 2011, fully recovering sales volumes prior to the crisis of This result was achieved thanks to better market conditions, with more requests for applications assembled with components manufactured by the Business Unit, to the growth in demand in main geographic reference segments, such as the United States, China, India, South America and Turkey, and to bigger market shares, made possible through business development actions and investments in new products in previous years. 58 ANNUAL REPORT 2011

60 Agricultural market The basic conditions behind the positive trend of agricultural machinery were maintained (an increase in the world population, an improvement in the standard of living, prices of agricultural materials, etc.) and, on markets with a robust growth trend and government aid, this led to considerable increases in demand, for example in Turkey, the Middle East, India and Brazil, while demand in Europe and North America remained steady compared to the previous year. In this context, demand for drives was particularly high for the Drive Tech product range and even beyond expectations. This led to tensions with deliveries, which the Business Unit solved incurring extra logistics and transport costs. Construction equipment market Consolidation of geographical areas, such as India, China and the United States continued in 2011, resulting in a considerable increase in demand, reflected by the Business Unit s sales which returned to 2008 volumes in the construction equipment segment and accounted for more than 50% of the Business Unit s total turnover. The demand for transmissions was also particularly important, with the same critical aspects as those referred to in previous sections. Material handling market The material handling market improved compared to the previous year, thanks to a general upturn in economic activities, which resulted in higher material handling volumes. Planetary drives market Demand for planetary drives went up, showing that consumption in the heavy construction industry has remained steady. Thanks to long-term business relations and the acquisition of considerable market shares, achieved above all with the introduction of the new medium-end range in China, the Business Unit also increased turnover in this segment. In the mine machinery market, characterised by moderate yet high-value volumes, Drive Tech maintained its consolidated position with the O&K Antriebstechnik brand. Replacement parts Sales of replacement parts increased considerably, due above all to actions targeting the promotion of independent channels and supply of more integrated services. Supply Chain and Inventories Price hikes in raw materials were incorporated into sales prices, albeit with a time lag, while the major restriction on the production capacity of suppliers, and above all Indian suppliers, meant that market opportunities could not be fully exploited dur- DIRECTORS REPORT ON OPERATIONS 59

61 ing the first part of the year and also resulted in extra logistics costs; these problems were gradually solved during Warehouse inventories reported the same growth trend as turnover, without any deterioration in inventory turnover. Turnover Turnover from the Drivelines Business Unit/ Drive Tech as at 31 December 2011 stood at million euro, up 41.71% compared to 2010 turnover ( million euro), due to the upturn in markets, improved competitive edge and a more effective sales policy, as described in full in the introduction. A breakdown of turnover between sales to third parties and intra-group is provided below: SALES SALES TO THIRD PARTIES INTRA-GROUP SALES Diff. % Diff. % Diff. % Drivelines 605, , , , ,411 12, The following table breaks down sales to third parties by geographical area: Geographical Area 2011 % 2010 % Difference % Germany 79, , United Kingdom 73, , United States 62, , Brazil 59, , China 49, , India 43, , Turkey 40, , France 28, , Poland 16, , Belgium 9, , Argentina 7, , Czech Republic 6, , Other 36, , Total Abroad 513, , Italy 77, , Total 590, , The break down of turnover by geographical area highlights significant growth on all markets compared to the previous year. In particular, sales in Turkey went up by % due to the good performance of the agricultural sector. For a correct understanding of data, it should be noted that Drive Tech s invoicing 60 ANNUAL REPORT 2011

62 markets are not end markets for vehicle use, as many OEMs concentrate production in Europe or North America, but sell mainly outside these areas. The following table breaks down sales to third parties by application segment: Sector 31/12/2011 % 31/12/2010 % Difference % Off-Highway 491, , Agricultural sector 182, , Const. equipment sector 309, , On-Highway 38, , Material handling 27, , Auto & Truck 7, , Systems for escalators 3, , Replacement parts 47, , Other 13, , Total 590, , Figures as at 31/12/2011. Ebitda and Ebit 31/12/2011 % of turnover 31/12/2010 % of turnover Diff.% Ebitda 1 32, , Ebit 2 21, , Understood as the sum of operating profit/(loss), amortisation, depreciation and impairment of fixed assets. 2 Understood as operating profit/(loss) in the income statement. Ebitda stood at million euro compared to million euro in 2010, accounting for 5.4% of turnover as at 31 December 2011, compared to 2.5% as at 31 December Ebit was positive amounting to million euro (3.5% of turnover), and was negative amounting to million euro as at 31 December 2010 (-0.8% of turnover). The improvement in results is attributable to the strong increase in turnover and control of overheads, which increased though not proportionally to the increase in turnover. As already mentioned, procurement and logistics problems partly affected margins for the year. DIRECTORS REPORT ON OPERATIONS 61

63 Financial expenses Figures as at 31/12/ /12/2011 % of turnover 31/12/2010 % of turnover Diff.% Financial expenses 10, , Financial expenses as at 31 December 2011 amounted to million euro (1.7% of turnover) against million euro (1.6% of turnover) as at 31 December Exchange Differences Figures as at 31/12/ /12/2011 % of turnover 31/12/2010 % of turnover Diff.% Exchange differences 1, Exchange differences as at 31 December 2011 were negative amounting to million euro (and were positive amounting to 301 thousand euro as at 31 December 2010). Net profit/(loss) Figures as at 31/12/ /12/2011 % of turnover 31/12/2010 % of turnover Diff.% Net profit/(loss) 3, , closed with a profit of million euro (+0.6% of turnover) compared to a loss of million euro (-3.1% of turnover) in the previous year. This result is due to improved income, with reference to Ebitda and Ebit. Amortisation, Depreciation and Impairment of Assets Figures as at 31/12/2011. Amortisation, depreciation and impairment 31/12/2011 % of turnover 31/12/2010 % of turnover Diff.% 11, , Investments Figures as at 31/12/ /12/ /12/2010 Investments ANNUAL REPORT 2011

64 Investments amount to million euro and refer entirely to production reorganisation programmes and the consolidation of testing necessary for new product development. Expenditure for research and development, the purposes and application of which are described in a specific section «Research and innovation», remained high in 2011, amounting million euro (1.7% of turnover), compared to million euro (1.9% of turnover) in Research and Innovation Figures as at 31/12/ /12/ /09/ /06/ /12/2010 Net financial position * 95,869 98, , ,883 * Understood as the sum of amounts payable to banks, short-, medium- and long-term bonds and loans, net of cash and cash equivalents, negotiable securities and financial receivables. The net financial position as at 31 December 2011 registered a negative balance of million euro compared to the negative balance of million euro as at 31 December The improvement over the previous year is due to 28 million euro from positive cash flows generated by the change in net working capital, and to 4 million euro from the disposal of production activities of the Polish company Fon Sa. Net financial position PERSONNEL Figures as at 31/12/2011. Workforce trend 31/12/ /12/ /12/2009 Executives Clerical staff Factory workers 1,686 1,473 1,115 Temporary workers Total 2,291 1,961 1,600 The increase in the workforce mainly refers to the increase in direct production functions, particularly at foreign production sites, with changes in other positions. DIRECTORS REPORT ON OPERATIONS 63

65 Summary data at 31/12/2010 of the companies belonging to the BU Drivelines / Drivetech Carraro Drive Tech Spa 1 31/12/2011 % of turn. 31/12/2010 % of turn. Carraro Argentina Sa Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 311, , ,892 55, Ebitda 9, n,r, Ebit 4, , Net profit/(loss) 6, , Amortisation, Depreciation and Impairment Diff.% 4, , , , Investments 4,290 3, Net financial pos. 70,525 88,527 1,132 1,035 Shareholders equity 19,599 26,036 23,321 24,870 Gearing Subholding and parent company of the Business Unit. Fon Sa 31/12/2011 % of turn. 31/12/2010 % of turn. Carraro India Pvt. Ltd. Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 6,651 9, ,036 64, Ebitda , , , Ebit , , , Net profit/(loss) 1, , , , Amortisation, Depreciation and Impairment Diff.% ,799 * , , Investments ,613 1,682 Net financial pos ,400 16,037 16,022 Shareholders equity ,940 15,598 Gearing * Includes million euro for the impairment of company assets Carraro China Drives System Co. Ltd. Carraro Technologies Ltd 1 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 68,814 36, , Ebitda 7, , n,r, Ebit 4, n,r, n,r, Net profit/(loss) 2, n,r, n,r, Amortisation, Depreciation and Impairment Diff.% 2, , Investments 1, ANNUAL REPORT 2011

66 Carraro China Drives System Co. Ltd. Carraro Technologies Ltd 1 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Net financial pos. 10,738 14, Shareholders equity 16,581 11, Gearing This company carries out design, research and development for the Group and third parties and is based in Pune (India). Diff.% Carraro North America Inc. (Virginia Beach) 31/12/2011 % of turn. 31/12/2010 % of turn. Carraro Drive Tech Do Brasil Inc. Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 1,109 1, Ebitda Ebit Net profit/(loss) Amortisation, Depreciation and Impairment Investments 1 Net financial pos Shareholders equity Gearing Diff.% O&K Antriebstechnik GmbH 31/12/2011 % of turn. 31/12/2010 * % of turn. Diff.% Turnover 62,964 15,575 n,r, Ebitda 9, , n,r, Ebit 8, , n,r, Net profit/(loss) 5, , n,r, Amortisation, Depreciation and Impairment n,r, Investments 2,481 1,804 Net financial pos. 1,779 1,127 Shareholders equity 18,645 13,082 Gearing * Economic data for 2010 refer exclusively to the last five months, because due to the reorganisation of the Drivelines BU / Drive Tech in 2010, the previous result came under the incorporating company Carraro Deutschland GmbH. DIRECTORS REPORT ON OPERATIONS 65

67 Friulia Carraro Spa 17.02% Siap Spa 100% Turbo Gears India Pvt Ltd % 82.98% 45.60% % Gear World Spa 28.22% Carraro International Sa Minigears Property 100% 100% Gear World North America Llc 100% Minigears Inc. 67% 100% 33% Minigears Suzhou Co. Ltd. Minigears Spa* 26.18% GE Capital * Includes the Poggiofiorito (Ch) plant 66 ANNUAL REPORT 2011

68 Business Unit Components Gear World DIRECTORS REPORT ON OPERATIONS 67

69 Components. The Application World Automotive 30,7 % Heavy Duty Light Duty 20% 80% Powertools 14,9 % Light Duty 100% Gardening 13,4 % Light Duty 100% Agricultural 10,2 % Heavy Duty Other 99% 1% 68 ANNUAL REPORT 2011

70 Gears, assemblies and car components, agricultural and earth movement applications, forklifts, electric tools and wind generators, compact drives and units for motorcycles and cars Construction Equipment 10,2 % Heavy Duty Other 98% 2% Material Handling 9,4 % Heavy Duty Light Duty Other 11% 88% 1% Eolic Energy 4,9 % Heavy Duty 100% Other 6,4 % DIRECTORS REPORT ON OPERATIONS 69

71 Summary Data and Graphs Components 2010 Net revenues 152, Net revenues 191,955 Operating income - 8,488 Adjusted for the effect of exchange differences Operating income 2,428 Adjusted for the effect of exchange differences Net income - 12,605 Net of minority interests Net income Net of minority interests Shareholders equity 35,250 Net Net of minority interests e 31,484 Shareholders equity 34,412 of minority interests e 30,675 Cash Flow 2,862 Cash Flow 13,658 Gross investments 6,698 Workforce at 31/12 1,509 Gross investments 9,835 Workforce at 31/12 1, ANNUAL REPORT 2011

72 Turnover by Geographical Area Total Foreign Countries 77.4 % 81.7 % Total Italy 22.6 % 18.3 % * 2011 turnover calculated on the total number of third party customers (excluding inter-company) Workforce Breakdown Executives Senior Managers Employees Breakdown by Sector of Application * Agricultural 10,2 % 12 % Automotive 30,7 % 12 % Construction Eq. 10,2 % 26 % Gardening 13,4 % 12 % Eolic Energy 4,9 % 5 % Power Tools 14,9 % 12 % Workers 1,340 1,297 Material Handling 9,4 % 1 % Other 6,4 % 20 % DIRECTORS REPORT ON OPERATIONS 71

73 Subconsolidated Income Statement as at 31/12/2011 BU Components / Gear World 31/12/11 % 31/12/10 % Changes 31/12/11 31/12/10 Changes 31/12/11 31/12/10 Revenues from sales 191, % 152, % 39, % Purch. of goods and materials (net of changes in inventories) Services and Use of thirdparty goods and services 91, % 71, % 19, % 47, % 37, % 9, % Personnel costs 37, % 36, % % Amortisation, depreciation and impairment of assets 14, % 15, % 1, % Provisions for risks % % % Other income and expenses % 1, % % Internal construction % % % Operating costs 189, % 160, % 28, % Operating profit/(loss) (Ebit) 2, % 8, % 10, % Income from equity investments 1,158 1,158 Other financial income % % 47 Financial costs and expenses 4, % 3, % 761 Net gains/(losses) on foreign exchange Value adjustments of financial assets Gains/(losses) on financial assets % % 1, % 0.00% 2 5, % 2, % 3, % Profit/(loss) before taxes 2, % 10, % 7, % Current and deferred income taxes 2, % 2, % 4,725 Net profit/(loss) % 12, % 12, % Profit/(loss) pertaining to minorities Business unit consolidated profit/(loss) % % % 12, % 11, % Ebitda 16, % 6, % 9, % Subconsolidated Statement of Financial Position as at 31/12/2011 BU Components / Gear World 31/12/11 31/12/10 Property, plant and equipment 95, ,426 Intangible fixed assets 23,722 24,670 Real estate investments ANNUAL REPORT 2011

74 31/12/11 31/12/10 Holdings in subsidiaries and associates Financial assets 2,068 3,214 Deferred tax assets 3,615 2,786 Trade receivables and other receivables Non-Current Assets 125, ,799 Closing inventory 34,280 30,165 Trade receivables and other receivables 40,621 39,389 Financial assets 1,849 1,827 Cash and cash equivalents 11,851 2,111 Current Assets 88,601 73,492 Total Assets 214, ,291 Share Capital 35,084 35,084 Reserves 4,011 8,106 Foreign currency translation reserve Net profit/(loss) for the year ,605 Minority interests 3,737 3,766 Shareholders Equity 34,412 35,250 Financial liabilities 30,884 71,844 Trade payables and other payables 5 4 Deferred tax liabilities 3,237 5,864 Provision for severance indemnity and retirement benefits 4,894 5,518 Provisions for risks and liabilities Non-Current Liabilities 39,195 83,370 Financial liabilities 77,712 33,001 Trade payables and other payables 59,865 53,012 Current taxes payables 1, Provisions for risks and liabilities 1,932 1,365 Current Liabilities 140,648 87,671 Total Shareholders Equity and Liabilities 214, ,291 Cash Flow as at 31/12/2011 BU Components / Gear World 31/12/11 31/12/10 Opening Net Financial Position 97, ,262 Group profit/(loss) ,605 Profit/(loss) pertaining to minorities Amortisation, depreciation and impairment of fixed assets 14,431 15,467 Cash flow before Net Working Capital 14,101 2,570 Change in Net Working Capital 2, Investments in fixed assets 9,835 6,698 Disinvestments in fixed assets DIRECTORS REPORT ON OPERATIONS 73

75 31/12/11 31/12/10 Operating Free Cash Flow 7,254 3,126 Other operating flows 3,051 1,840 Other investing flows 1,302 6,563 Change in Share Capital Dividends paid Other equity flows 508 1,296 Assets available for sale Free Cash Flow 4,997 6,573 Closing Net Financial Position 92,692 97,689 Analysis of Net Working Capital as at 31/12/2011 BU Components / Gear World 31/12/11 31/12/10 Trade Receivables 33,044 31,778 Inventory 34,280 30,165 Trade Payables 52,802 45,232 Net Working Capital (NWC) 14,522 16,711 After a first quarter marked by general caution, 2011 closed with a considerable upturn in market demand, which contributed to improving turnover of the Components Business Unit / Gear World compared to the previous year, and exceeded budget forecasts. Revenues amounted to million euro, up 26.2% compared to Turnover from third party customers amounted to million euro, up 20.8% compared to The increase in revenues arising from sales to Group companies was even more significant, amounting to million euro, with a 38.9% increase over the previous year. An analysis of figures by application sector shows that the Agricultural (+87%), Automotive (+64%) and Construction Equipment (+31%) sectors performed extremely well compared to 2010, while the trend of the Material Handling sector (+16%) was good and remained stable for the Lawn and Garden sector (+1.4%). Performance in the alternative energies sector did not meet expectations, particularly as regards gears for wind multipliers, which registered a decrease (-5%) compared to 2010, because of issues with the granting of benefits for investments in the sector and the credit crunch. As regards sales penetration in terms of geographical segment, Europe is still the main reference area of the Components Business Unit / Gear World, with Germany as its main outlet market. Growth in China and India was boosted considerably, confirming the validity of the project to reorganise the Group s production footprint, which got underway in ANNUAL REPORT 2011

76 As regards customer requests, premium technologies (grinding, slotting, broaching) remained in considerable demand, causing some tensions with customer service. However the general level of requested volumes was sufficient to occupy facilities dedicated to other technologies (shaving), and this meant that production efficiency improved compared to previous years. The shorter delivery times requested by customers and unexpected increase in demand caused supply chain difficulties in the first part of the year, which were gradually solved in the second half. During 2011, two important programmes to improve production efficiency were launched: the Partnership Project, to radically cut down on the number of suppliers, and the Bottle Neck Project, to improve production processes relative to main machinery. These projects started to produce the first results in 2011 and will be fundamental over the next few years. In terms of profitability, the benefit from the considerable increase in turnover, which resulted in a better absorption of overheads, was coupled with improved production efficiency, as explained further on. Turnover from the Components Business Unit / Gear World, equal to million euro as at 31 December 2011, went up by 26.2% compared to the previous year ( million euro). The reasons for this important growth in sales volumes are explained in full in the previous section. A breakdown of turnover between sales to third parties and intra-group is provided below: Turnover SALES SALES TO THIRD PARTIES INTRA-GROUP SALES Diff. % Diff. % Diff. % Components 191, , , , ,308 45, The following table breaks down sales to third parties by geographical area: Geographical Area 2011 % 2010 % Difference % Germany 29, , United States 20, , Sweden 13, , China 13, , Brazil 4, , Belgium 4, , India 3, , Austria 2, , United Kingdom 1, , Switzerland 1, , Finland , Other 3, , DIRECTORS REPORT ON OPERATIONS 75

77 Geographical Area 2011 % 2010 % Difference % Total Abroad 99, , Italy 29, , Total 128, , As previously explained, the reference markets for Business Unit sales are European, and in particular Germany which accounts for 22.6% of total turnover, and Sweden which accounts for 10.4% of total turnover for the year. Sales in the United States increased considerably in absolute terms compared to the previous year (+17%); in terms of the percentage accounting for total turnover they stood at 16.29%, slightly down on the figure of 16.83% in Areas recording the strongest growth were India (+39.8% compared to 2010), China (+32.3% compared to 2010) and Brazil (+17.3% compared to 2010), in line with forecasts for market demand trends and the production footprint review process launched by the Business Unit. The following table breaks down total sales to third party customers by application segment: Sector 31/12/2011 % 31/12/2010 % Difference % Agricultural 13, , Construction Equipment 13, , Renewable Energy 6, , Material Handling 12, , Automotive 39, , Gardening & Power Tools 36, , Other Market 7, , Total 128, , Ebitda and Ebit Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Ebitda 1 16, , Ebit 2 2, , Understood as the sum of operating profit/(loss), amortisation, depreciation and impairment of fixed assets. 2 Understood as operating profit/(loss) in the income statement. Ebitda was positive, amounting to million euro and accounting for 8.8% of turnover, improving on the figure of million euro (4.6% of turnover) in Ebit was equal to million euro, accounting for +1.3% of turnover (while it was negative amounting to million euro and accounting for -5.6% of turnover in 2010). 76 ANNUAL REPORT 2011

78 The improvement in margins is due to higher volumes and a greater production efficiency achieved by redefining industrial processes. A more careful management of the supply chain also made it possible to significantly improve on inefficiencies that had had a negative impact on the previous year. Transport costs for purchases and sales decreased, as well as other costs relating to the supply of materials and outsourcing. A minor increase in overheads contributed to this result, and thanks to an increase in volumes, impact on turnover compared to the previous year, was less significant. Figures as at 31/12/2011. Financial expenses 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% Financial expenses 4, , Financial expenses amounted to million euro (2.2% of turnover) compared to million euro (2.3% of turnover) in the previous year. Growth in absolute terms was due to the increase in the cost of money, which remained however in line with the increase in turnover. Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Exchange differences Exchange differences as at 31 December 2011 were negative amounting to 892 thousand euro (and were positive amounting to 214 thousand euro as at 31 December 2010). Exchange Differences Figures as at 31/12/2011. Net profit/(loss) 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% Net profit/(loss) , closed with a loss of 773 thousand euro (-0.4% of turnover) which changed considerably compared to the net loss of million euro (-8.3% of turnover) registered in the previous year. As already mentioned, this improvement is due to the effects of increased volumes and a better production efficiency. DIRECTORS REPORT ON OPERATIONS 77

79 Amortisation, Depreciation and Impairment of Assets Figures as at 31/12/2011. Amortisation, depreciation and impairment 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% 14, , thousand euro relative to the impairment of company assets of MG Mini Gears Spa and 8 thousand euro of Minigears Suzhou CO. (China) are included. Investments Figures as at 31/12/ /12/ /12/2010 Investments 9,835 6,698 During the year, investments totalling million euro were made compared to million euro in 2010, earmarked for programmes to improve production efficiency and for the technological maintenance of existing plants. Net financial position Figures as at 31/12/ /12/ /09/ /06/ /12/2010 Net financial position * 92,692 96,334 98,549 97,689 * Understood as the sum of amounts payable to banks, short-, medium- and long-term bonds and loans, net of cash and cash equivalents, negotiable securities and financial receivables. The net financial position improved by 5 million euro compared to 31 December 2010; net of negative operating cash flows relative to investments in assets (9.8 million euro), this change was mainly due to the improvement in net working capital. PERSONNEL Workforce trend Figures as at 31/12/ /12/ /12/ /12/2009 Executives Clerical staff Factory workers 1,087 1,060 1,184 Temporary workers Total 1,553 1,509 1, ANNUAL REPORT 2011

80 Summary data at 31/12/2011 of the companies belonging to the BU Components / Gear World Gear World Spa 1 31/12/2011 % of turn. 31/12/2010 % of turn. Siap Spa Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 2,797 1, ,988 50, Ebitda 1, , , , Ebit 1, , , n,r, Net profit/(loss) 1, , , , Amortisation, Dep. and Impairment Diff.% , , Investments 2 5 1,949 2,085 Net financial pos. 12,866 9,910 15,109 21,653 Shareholders equity 47,156 48,458 29,720 26,961 Gearing Subholding and parent company of the Business Unit. Turbo Gears India Pvt Ltd 31/12/2011 % of turn. 31/12/2010 % of turn. Minigears Spa Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 15,629 10, ,394 66, Ebitda 1, n,r, 6, , Ebit , , Net profit/(loss) 1, , , Amortisation, Dep. and Impairment Diff.% 1, , , , Investments 4,574 1,159 2,555 3,677 Net financial pos. 9,245 6,646 46,012 51,981 Shareholders equity 7,020 9,807 5,408 5,257 Gearing Minigears Suzhou Co Ltd 31/12/2011 % of turn. 31/12/2010 % of turn. Minigears Inc (USA) Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 20,797 15, ,780 11, Ebitda 2, , , Ebit , Net profit/(loss) , Amortisation, Dep. and Impairment Diff.% 1, , , Investments 1,131 2, Net financial pos. 3,642 3,124 5,818 4,376 Shareholders equity 8,745 7,685 2,213 3,147 Gearing DIRECTORS REPORT ON OPERATIONS 79

81 80 ANNUAL REPORT 2011

82 Business Unit Vehicles Agritalia DIRECTORS REPORT ON OPERATIONS 81

83 Vehicles. Customers and Application Areas Agco 43 % Claas 27.3 % John Deere 22.9 % 1.9 % 82 ANNUAL REPORT 2011

84 Light-utility tractors (up to 100 hp) for vineyards and orchards, for the leading international manufacturers; outsourced engineering and production services for specialised tractor markets Light Utility Vineyards Orchards 63% 12% 25% 40% 37% 23% 26% 13% 61% 24% 12% 64% DIRECTORS REPORT ON OPERATIONS 83

85 Summary Data and Graphs Vehicles 2010 Net revenues 56, Net revenues 89,303 Operating income - 2,919 Adjusted Adjusted for the effect of exchange differences Operating income 1,783 for the effect of exchange differences Net income - 3,255 Net Net of minority interests Net income 993 of minority interests Shareholders equity 7,075 Shareholders equity 8,054 Cash Flow - 2,092 Cash Flow 2,191 Gross investments 683 Workforce at 31/ Gross investments 806 Workforce at 31/ ANNUAL REPORT 2011

86 Turnover by Geographical Area Total Foreign Countries 92.8 % 90.5 % Total Italy 7.2 % 9.5 % * 2011 turnover calculated on the total number of third party customers (excluding inter-company) Workforce Breakdown Executives Senior Managers Employees Breakdown by Sector of Application * Agriculture 100 % 100 % Workers DIRECTORS REPORT ON OPERATIONS 85

87 Income Statement as at 31/12/2011 BU Vehicles / Agritalia 31/12/11 % 31/12/10 % Changes 31/12/11 31/12/10 Changes 31/12/11 31/12/10 Revenues from sales 89, % 56, % 32, % Purch. of goods and materials (net of changes in inventories) Services and Use of thirdparty goods and services 67, % 43, % 23, % 7, % 5, % 2, % Personnel costs 10, % 9, % % Amortisation, depreciation and impairment of assets 1, % 1, % % Provisions for risks 1, % % % Other income and expenses % % % Internal construction % % 176 n,s, Operating costs 87, % 59, % 28, % Operating profit/(loss) (Ebit) 1, % 2, % 4, % Income from equity investments Other financial income % 0.00% 191 Financial costs and expenses % % 17 Net gains/(losses) on foreign exchange Value adjustments of financial assets Gains/(losses) on financial assets % % % 0.00% % % % Profit/(loss) before taxes 1, % 2, % 4, % Current and deferred income taxes Business unit consolidated profit/(loss) % % % 3, % 4, % Ebitda 2, % 1, % 4, % Statement of Financial Position as at 31/12/2011 BU Vehicles / Agritalia 31/12/11 31/12/10 Property, plant and equipment 12,306 12,619 Intangible fixed assets Real estate investments Holdings in subsidiaries and associates Financial assets Deferred tax assets 2,619 2, ANNUAL REPORT 2011

88 31/12/11 31/12/10 Trade receivables and other receivables 8 8 Non-Current Assets 15,383 15,705 Closing inventory 13,041 10,188 Trade receivables and other receivables 6,214 8,773 Financial assets 4 22 Cash and cash equivalents 11,131 4 Current Assets 30,390 18,987 Total Assets 45,773 34,692 Share Capital Reserves 7,061 10,330 Foreign currency translation reserve Net profit/(loss) for the year 993 3,255 Minority interests Shareholders Equity 8,054 7,075 Financial liabilities Trade payables and other payables Deferred tax liabilities Provision for severance indemnity and retirement benefits 1,103 1,138 Provisions for risks and liabilities Non-Current Liabilities 1,571 1,611 Financial liabilities 48 3,624 Trade payables and other payables 33,948 20,895 Current taxes payables Provisions for risks and liabilities 2,152 1,487 Current Liabilities 36,148 26,006 Total Shareholders Equity and Liabilities 45,773 34,692 Cash Flow as at 31/12/2011 BU Vehicles / Agritalia 31/12/11 31/12/10 Opening Net Financial Position 3,615 1,622 Group profit/(loss) 993 3,255 Profit/(loss) pertaining to minorities Amortisation, depreciation and impairment of fixed assets 1,198 1,163 Cash flow before Net Working Capital 2,191 2,092 Change in Net Working Capital 12,028 1,400 Investments in fixed assets Disinvestments in fixed assets Operating Free Cash Flow 13,451 3,780 Other operating flows 1,258 1,076 DIRECTORS REPORT ON OPERATIONS 87

89 31/12/11 31/12/10 Other investing flows Change in Share Capital Dividends paid Other equity flows Free Cash Flow 14,698 5,237 Closing Net Financial Position 11,083 3,615 Analysis of Net Working Capital as at 31/12/2011 BU Vehicles / Agritalia 31/12/11 31/12/10 Trade Receivables 6,892 8,380 Inventory 13,041 10,188 Trade Payables 32,266 18,873 Net Working Capital (NWC) 12, The increase in demand on main reference markets (France and Germany) and the acquisition of a larger market share in the area of Turkey meant that 2011 closed with a turnover of million euro, equal to 3,640 tractors sold, up 58.0% over the previous year when turnover amounted to million euro, equal to 2,378 tractors sold. The production area contributed considerably to this result, capable of meeting demand while guaranteeing a better product quality. Revenues from engineering projects for the development of new Tier 4 Interim tractor ranges, with production start-up scheduled for 2014, also made a positive contribution. Ebitda as at 31 December 2011 was positive amounting to million euro (3.3% of turnover) compared to a negative value of million euro (-3.1% of turnover) in Ebit also increased compared to the previous year, from a negative value of million euro (5.2% of turnover) as at 31 December 2010 to a positive value equal to million euro (2.0% of turnover) in The improvement in profitability is due to a greater focus on customer pricing policies, which made it possible to absorb the increase in raw material costs, and to engineering activities which targeted higher standardisation levels for components. The lower impact of processing costs also contributed, thanks to the start of the Agritalia Production System project which will reorganise production site work with a lean focus. To manage the production increase compared to the previous year, the Business Unit used temporary work contracts (the number of temporary staff went up from 10 in 2010 to 36 in 2011) while the number of employees on an open-ended contract remained the same (214). 88 ANNUAL REPORT 2011

90 In financial terms, the Business Unit realised a free cash flow during the year of million euro. This was achieved thanks to careful business negotiations with main customers to reduce payment times and the start of a project to optimise warehouse inventories which will end in 2012 and involves the kanban management of main suppliers. Turnover from the Vehicles Business Unit / Agritalia as at 31 December 2011 amounted to million euro (equal to 3,640 tractors) compared to million euro (2,378 tractors) as at 31 December A breakdown of turnover between sales to third parties and intra-group is provided below: Turnover SALES SALES TO THIRD PARTIES INTRA-GROUP SALES Diff. % Diff. % Diff. % Vehicles 89,303 56, ,428 53, ,875 2, The following table breaks down sales to third parties by geographical area: Geographical Area 2011 % 2010 % Difference % Switzerland 42, , France 22, , Germany 12, , Poland Portugal Other Total Abroad 79, , Italy 6, , Total 85, , Figures as at 31/12/2011. Ebitda and Ebit 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% Ebitda 1 2, , Ebit 2 1, , Understood as the sum of operating profit/(loss), amortisation, depreciation and impairment of fixed assets. 2 Understood as operating profit/(loss) in the income statement. Ebitda was positive amounting to million euro, accounting for +3.3% of turnover, against a negative figure of million euro (-3.1% of turnover) in Ebit was positive amounting to million euro (+2.0% of turnover), against a negative figure of million euro (-5.20% of turnover) in DIRECTORS REPORT ON OPERATIONS 89

91 Financial expenses Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Financial expenses n.r. Financial expenses as at 31 December 2011 were positive amounting to 171 thousand euro and accounting for 0.2% of turnover, while they were negative amounting to 37 thousand euro (-0.1% of turnover) in the previous fiscal year. Exchange Differences Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Exchange differences Exchange differences as at 31 December 2011 were positive amounting to 1 thousand euro (and were negative amounting to 24 thousand euro as at 31 December 2010). Net profit/(loss) Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Net profit/(loss) , closed with a profit of 993 thousand euro (1.1% of turnover) registering an improvement compared to the loss of million euro (-5.8% of turnover) in the previous year. Amortisation, Depreciation and Impairment of Assets Figures as at 31/12/2011. Amortisation, depreciation and impairment 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% , ,1 3,0 Amortisation and depreciation are in line with the previous fiscal year in absolute terms. The lower impact on turnover is attributable to the increase in turnover compared to the previous year. 90 ANNUAL REPORT 2011

92 Figures as at 31/12/2011. Investments 31/12/ /12/2010 Investments In 2011 total research and innovation costs amounted to million euro compared to costs of million euro incurred in Research and innovation Figures as at 31/12/ /12/ /09/ /06/ /12/2010 Net financial position * 11,083 3,497 5,40 3,615 * Understood as the sum of amounts payable to banks, short-, medium- and long-term bonds and loans, net of cash and cash equivalents, negotiable securities and financial receivables. The net financial position as at 31 December 2011 registered a positive balance of million euro compared to the negative balance of million euro as at 31 December The improvement over the previous year is attributable to the generation of positive cash flows, made possible by careful business negotiations with main customers to reduce payment times. Net financial position PERSONNEL Figures as at 31/12/2011. Workforce trend 31/12/ /12/ /12/2009 Executives Clerical staff Factory workers Temporary workers Total DIRECTORS REPORT ON OPERATIONS 91

93 Zao Santerno 100% 99.66% 100% Elettronica Santerno España Sl 100% Elettronica Santerno Spa Eletronica Santerno Industria e Comercio Ltda 100% 100% 67% Santerno Inc. 33% MG Shangai Trad Ltd Energy Engineering Srl 100% Carraro International Sa 0.34% Carraro Spa 92 ANNUAL REPORT 2011

94 Business Unit Electronics Elettronica Santerno DIRECTORS REPORT ON OPERATIONS 93

95 Electronics. The Core Business of Photovoltaic Photovoltaic 86,74 % Industrial 11,73 % Services 1,45 % Eolic 0,08 % 94 ANNUAL REPORT 2011

96 Inverters for power management in various industrial sectors and the renewable energy field (photovoltaic and wind); systems for managing electric and hybrid powertrains Sunway Station 30,90 % Three-phase PV Inverter 45,10 % Single-phase PV Inverter 4,90 % Other 19,10 % DIRECTORS REPORT ON OPERATIONS 95

97 Summary Data and Graphs Electronics 2010 Net revenues 143, Net revenues 124,981 Operating income 33,145 Adjusted for the effect of exchange differences Adjusted Operating income 13,463 for the effect of exchange differences Net income 22,040 Net Net of minority interests Net income 7,561 of minority interests Shareholders equity 32,604 Shareholders equity 47,868 Cash Flow 23,078 Cash Flow 9,986 Gross investments 6,680 Workforce at 31/ Gross investments 4,210 Workforce at 31/ ANNUAL REPORT 2011

98 Turnover by Geographical Area Total Foreign Countries 16.6 % 14.1 % Total Italy 83.4 % 86 % * 2011 turnover calculated on the total number of third party customers (excluding inter-company) Workforce Breakdown Executives Senior Managers Employees Breakdown by Sector of Application * Renewable Energies 86.9 % 89 % Other 1 % 1 % Workers 2 Industrial 12.1 % 10 % DIRECTORS REPORT ON OPERATIONS 97

99 Subconsolidated Income Statement at 31/12/2011 BU Electronics / Elettronica Santerno 31/12/11 % 31/12/10 % Changes 31/12/11 31/12/10 Changes 31/12/11 31/12/10 Revenues from sales 124, % 143, % 18, % Purch. of goods and materials (net of changes in inventories) Services and Use of thirdparty goods and services 67, % 69, % 1, % 26, % 27, % 1, % Personnel costs 15, % 12, % 2, % Amortisation, depreciation and impairment of assets 3, % 1, % 1, % Provisions for risks 2, % 2, % % Other income and expenses 1, % % 1, % Internal construction 2, % 2, % 52 n,s, Operating costs 111, % 110, % % Operating profit/(loss) (Ebit) 13, % 33, % 19, % Income from equity investments Other financial income % % 42 Financial costs and expenses % % 169 Net gains/(losses) on foreign exchange Value adjustments of financial assets Gains/(losses) on financial assets % % % 0.00% % % % Profit/(loss) before taxes 12, % 33, % 20, % Current and deferred income taxes 5, % 11, % 5,871 Net profit/(loss) 7, % 22, % 14, % Profit/(loss) pertaining to minorities Business unit consolidated profit/(loss) 0.00% 0.00% 7, % 22, % 14, % Ebitda 15, % 34, % 18, % Subconsolidated Statement of Financial Position as at 31/12/2011 BU Electronics / Elettronica Santerno 31/12/11 31/12/10 Property, plant and equipment 5,622 4,744 Intangible fixed assets 29,181 10,367 Real estate investments Holdings in subsidiaries and associates 98 ANNUAL REPORT 2011

100 31/12/11 31/12/10 Financial assets Deferred tax assets 3,014 2,204 Trade receivables and other receivables Non-Current Assets 38,033 17,526 Closing inventory 21,563 35,680 Trade receivables and other receivables 37,010 50,106 Financial assets Cash and cash equivalents 8,912 27,989 Current Assets 67, ,793 Total Assets 105, ,319 Share Capital 2,500 2,500 Reserves 37,720 7,939 Foreign currency translation reserve Net profit/(loss) for the year 7,561 22,040 Minority interests Shareholders Equity 47,868 32,604 Financial liabilities Trade payables and other payables Deferred tax liabilities Provision for severance indemnity and retirement benefits Provisions for risks and liabilities Non-Current Liabilities 1, Financial liabilities 7,654 1,327 Trade payables and other payables 44,842 82,249 Current taxes payables ,885 Provisions for risks and liabilities 3,158 3,471 Current Liabilities 56,614 97,932 Total Shareholders Equity and Liabilities 105, ,319 Cash Flow al 31/12/2011 BU Electronics / Elettronica Santerno 31/12/11 31/12/10 Opening Net Financial Position 26,680 4,373 Group profit/(loss) 7,561 22,040 Profit/(loss) pertaining to minorities Amortisation, depreciation and impairment of fixed assets 2,425 1,038 Cash flow before Net Working Capital 9,986 23,078 Change in Net Working Capital 10,578 5,291 Investments in fixed assets 4,210 6,680 Disinvestments in fixed assets Operating Free Cash Flow 4,658 21,693 Other operating flows 10,091 10,464 DIRECTORS REPORT ON OPERATIONS 99

101 31/12/11 31/12/10 Other investing flows 18, Change in Share Capital Dividends paid 10,000 Other equity flows 17, Free Cash Flow 25,097 31,053 Closing Net Financial Position 1,583 26,680 Analysis of Net Working Capital at 31/12/2011 BU Electronics / Elettronica Santerno 31/12/11 31/12/10 Trade Receivables 30,641 47,346 Inventory 21,563 35,680 Trade Payables 34,243 75,643 Net Working Capital (NWC) 17,961 7, was a positive year for the Business Unit on the whole, although characterized by a contrasting performance. In the first part of the year, the growth trend in sales remained in line with 2010, while in the second half, as a result of uncertainties relating to the switch from the Third to the Fourth Energy Bill demand dropped considerably, with a negative impact on margins. Despite this high level of uncertainty on the Italian market, the company was able to maintain its market share. Turnover amounted to million euro, compared to in 2010, the year when the Italian photovoltaic market peaked. Industrial drives The world market of industrial drives continued the growth trend that began in the previous year. Elettronica Santerno confirmed its expectations for development on the Italian and foreign market. The year basically ended in line with expectations, and was also characterised by some very positive aspects (the increase in sales in Italy and some areas in Asia), and improvements, particularly on markets where a more marked sales presence is required (in Russia and Brazil for example). Energy management Photovoltaics The Italian market was affected a great deal by legal developments, firstly by the Alcoa Decree and subsequently by the introduction of the Fourth Energy Bill. The combined effect of these major elements of instability led to a drop in demand in the second half, particularly for large-scale plants, and this was accentuated by the strong credit crunch of the banking system. 100 ANNUAL REPORT 2011

102 On the European market, the Spanish subsidiary performed well, thanks to some major projects developed in France by Spanish EPCs. Penetration on the Chinese market continued successfully, with Santerno confirming its position as one of the three leading foreign operators in the country, thanks also to some installations at high-value sites which are of worldwide importance as regards environmental and operating conditions (mountainous deserts, installations in sites over 4000 metres above sea level, etc.). In 2011, Santerno successfully launched its own sales activities on the Indian market, receiving orders for some important projects ahead of initial year forecasts. In late 2011, the first photovoltaic inverters were installed in Canada and the US, laying the foundations for future growth in these areas. Wind power Santerno has maintained a mainly tactical strategy in the sector, to lever specific opportunities on various markets. Turnover as at 31 December 2011 amounted to million euro, down by approximately 19 million euro (-13.14%) compared to the previous year. The year, which began according to expectations, with signs confirming the volumes of the previous year, was marked by a change in March, after the «Romani decree» was issued. With this decree, the Italian government unexpectedly stopped the special rates of the Third Energy Bill, requiring incentives for new plants to end in May 2011, and leaving a future decree (which introduced the Fourth Energy Bill) to define new special tariffs for photovoltaic plants in Italy and without mains feedin, after 31 May Although the market picked up in part after the introduction of the Fourth Energy Bill, many orders were cancelled for several millions of euro. As a result turnover in the second half dropped compared to the first half of the year, and prices continued to fall considerably. Foreign turnover, which increased in overall terms compared to the previous year, was not able to offset the downturn in demand in Italy. With the downsizing of the German market, which was second in importance in 2010, the Business Unit levered new interesting opportunities in India (where some large-scale plants were developed, realising approximately 2.5 million euro of turnover) and acquired its first orders on the US market. A breakdown of turnover between sales to third parties and intra-group is provided below: Turnover SALES SALES TO THIRD PARTIES INTRA-GROUP SALES Diff. % Diff. % Diff. % Electronics 124, , , , ,817 2, DIRECTORS REPORT ON OPERATIONS 101

103 The following table breaks down sales to third parties by geographical area: Geographical Area 2011 % 2010 % Difference % Spain 5, , Brazil 3, , India 2, Germany 1, , Other 6, , Total Abroad 20, , Italy 101, , Total 121, , Ebitda and Ebit Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Ebitda 1 15, , Ebit 2 13, , Understood as the sum of operating profit/(loss), amortisation, depreciation and impairment of fixed assets. 2 Understood as operating profit/(loss) in the income statement. Ebitda decreased significantly compared to the previous year, going down from million euro (23.8% of turnover) to million euro (12.7% of turnover). Ebit decreased as a result, compared to the previous year, down from 33.1 million euro (23.0% of turnover) to million euro (10.8% of turnover). Margins were affected by ongoing overheads which were in line with the previous year in absolute terms as they relate to long-term development plans; the Wage Guarantee Fund was only used in the last part of the year, for 81 employees. Financial expenses Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Financial expenses Financial expenses amounted to 355 thousand euro (0.3% of turnover) compared to 228 thousand euro (0.2% of turnover) in the previous fiscal year. The balance, net of financial income amounting to 221 thousand euro, includes charges to maintain medium-/long-term credit line availability. 102 ANNUAL REPORT 2011

104 Figures as at 31/12/ /12/2011 % of turn. 31/12/2010 % of turn. Diff.% Exchange differences Exchange Differences Exchange differences as at 31 December 2011 were positive amounting to 417 thousand euro against 124 thousand euro in the previous fiscal year. Figures as at 31/12/2011. Net profit/(loss) 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% Net profit/(loss) 7, , After taxes amounting to million euro, 2011 closed with a profit of million euro (6.1% of turnover). Figures as at 31/12/2011. Amortisation, depreciation and impairment 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% 2, , Amortisation, Depreciation and Impairment of Assets Figures as at 31/12/2011. Investments 31/12/ /12/2010 Investments 4,210 6,680 In financial year 2011 investments of million euro (3.30% of turnover) were made, compared with million euro in 2010 (4.6% of turnover). These were for systems and testing tools destined for expansion of the manufacturing capacity and basic software, patents and R&D projects destined for the development of new products. The company, which is now a leading world player in its reference sector, is gradually upgrading its industrial product range and developing new basic technological solutions for renewable energy applications, as product modernisation is a key strategy for medium-/long-term growth. Compared to 2010, with costs equal to million euro, expenditure went up by approximately million euro to million euro, equal to a 14.8% increase. Research and development costs represent 5% of Santerno s turnover. Research and innovation

105 Net financial position Figures as at 31/12/ /12/ /09/ /06/ /12/2010 Net financial position * 1,583 3,639 20,175 26,680 * Understood as the sum of amounts payable to banks, short-, medium- and long-term bonds and loans, net of cash and cash equivalents, negotiable securities and financial receivables. The Business Unit closed 2011 with a positive financial position equal to million euro compared to million euro as at 31 December The decrease in cash and cash equivalents of million euro is due to approximately 10 million euro paid as dividends in the year, million for taxes paid relative to 2010 and used for operating activities. PERSONNEL Workforce trend Figures as at 31/12/ /12/ /12/ /12/2009 Executives Clerical staff Factory workers 3 11 Temporary workers Total Summary data at 31/12/2011 of the companies belonging to the BU Electronics / Elettronica Santerno Elettronica Santerno Spa 1 31/12/2011 % of turn. 31/12/2010 % of turn. Zao Santerno (Russia) Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover , ,0 Ebitda , ,0 51, , ,1 +45,3 Ebit , ,3 56, , ,0 +45,4 Net profit/(loss) , ,2 67, , ,6 +133,0 Amortisation, Dep. and Impairment Diff.% , ,7 +143,4 6 1,7 4 0,8 +50,0 Investments Net financial pos Shareholders equity Gearing 0,02 0,78 0,21 0,75 1 Subholding and parent company of the Business Unit. 104 ANNUAL REPORT 2011

106 Eletronica Santerno Industria e Comercio Ltda (Brasile) 31/12/2011 % of turn. 31/12/2010 % of turn. Elettronica Santerno Espana SL Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover , ,5 Ebitda 349 9, ,7 n.r 250 3, ,7 n.r. Ebit , ,1 n.r , ,2 n.r. Net profit/(loss) , ,6 n.r , ,0 n.r. Amortisation, Dep. and Impairment Diff.% 65 1,8 55 1,5 +18,2 7 0,0 11 4,4 36,4 Investments Net financial pos Shareholders equity Gearing 6,88 0,41 0,68 0,30 MG Shanghai Trading Ltd 31/12/2011 % of turn. 31/12/2010 % of turn. Santerno Inc Diff.% 31/12/2011 % of turn. 31/12/2010 % of turn. Turnover 1 3 n.r. 242 n.r. Ebitda n.r n.r. Ebit n.r n.r. Net profit/(loss) n.r n.r. Amortisation, Dep. and Impairment 1 n.r.. 2 Investments Net financial pos Shareholders equity Gearing 1,86 0,98 0,84 n.r. Diff.% Energy Engineering Srl 31/12/2011 % of turn. 31/12/2010 % of turn. Diff.% Turnover n.r. Ebitda 108 3,7 188 n.r. +42,5 Ebit 118 4,1 197 n.r. +40,1 Net profit/(loss) 132 4,5 176 n.r +25,0 Amortisation, Dep. and Impairment 10 0,4 9 25,7 +26,9 Investments 2 Net financial pos Shareholders equity Gearing 0,41 1,23 DIRECTORS REPORT ON OPERATIONS 105

107 106 ANNUAL REPORT 2011

108 SIGNIFICANT EVENTS IN FINANCIAL YEAR 2011 During 2011, the Group continued activities to streamline and reorganise companies, that had begun in previous years, with the aim of updating the Group s structure to market conditions and to focus attention on strategic activities. On 8 September 2011, the Polish subsidiary Fabryka Osi Napedowych Sa undersigned with the company Fon Skb Sp. Zo.o. a transfer agreement concerning a corporate branch including immovable properties, tangible and intangible assets, other assets, bonds, contract relations and relative rights on the assembly, processing and sale activities of axles and mechanical components carried out at the Radomsko plant. As part of the project to streamline the Business Units, the company Carraro Technologies became a part of the Drivelines BU / Drive Tech following the sale of the investment held by Carraro International Sa to Carraro Drive Tech Spa on 7 June Further reorganisation activities involved the Drivelines Business Unit / Drive Tech, in particular: the merger through incorporation of Carraro PNH Components with Carraro India Pvt Ltd., on 18 November 2011; the liquidation of Carraro Qingdao Trading Co. Ltd, controlled by Carraro Drive Tech Spa, on 27 December 2011; the sale of the investment in Carraro Drivetech do Brasil Comércio de Sistemas Automotivos Ltda by the company Carraro Argentina Sa to the parent company Carraro Drive Tech Spa, on 6 July 2011 and increase in share capital of 1,156,800 Brazilian Real on 28 October KEY RISKS AND UNCERTAINTIES TO WHICH CARRARO SPA AND THE GROUP ARE EXPOSED Risks associated with the general economic conditions The Group s financial, capital and borrowing situation is influenced by various factors within the general macro-economic framework, such as changes to the gross national product, the state of the agricultural and construction industries, the cost of raw materials and the level of business confidence in the various countries in which the Group operates was characterised by a sudden downturn in the prospects for growth in all main advanced economies, particularly in the second half of the year, and this was related to sovereign debt tensions in the eurozone and uncertainties over the process to consolidate public finances in the United States, as well as a continuing weakness in employment trends in western countries. DIRECTORS REPORT ON OPERATIONS 107

109 In particular, Italy was affected a great deal by these problems due to considerable public debt, a strong dependence of economic activities on international trade, and poor prospects for growth in the medium term. Future scenarios depend a great deal on developments in Europe s sovereign debt crisis. Continuing difficulties with borrowing in the European banking sector could reduce capacity to provide businesses with credit and this in turn could escalate the decline in production activities and have further repercussions on sovereign debt. Risks having an effect on the Group s results Significant macro-economic events, such as a generalised and significant increase in the prices of raw materials, a significant fall in demand in one of the key markets of the Group, enduring uncertainty and volatility of the financial and capital markets, falling interest rates and unfavourable changes in the exchange rates of the major currencies to which the Group is exposed are all negative factors for the Group s operations and future, as well as its economic results and its financial position. Group s profitability is affected by the risk of insolvency of its counterparties, as well as the general economic conditions of the country in which the Group carries out its industrial and commercial operations. Risks associated with funding requirements The Group s liquidity risk is mainly linked to the activation and maintenance of sufficient funding to support industrial operations. The raising of funds, consistent with the Group s short- and medium-term development plans, is intended to finance both the working capital and investments in fixed assets necessary to ensure sufficient and technologically advanced production capacity. This requirement is directly proportional to the trend in customer orders and the consequent trend in business volumes. The cash flows envisaged for financial year 2012 include, besides the trend in working capital and investments, the effects of current liabilities and the short-term portions of medium- and long-term loans reaching maturity, as well as the effects (assuming the same rates of exchange with respect to ) of the closure of derivative financial instruments on currencies in existence at the reporting date. The Group envisages meeting the needs arising from all of the above with the flows deriving from operations, available liquidity and the availability of additional credit facilities. Considering the positive trend of sales volumes, which should be maintained also in subsequent years, and as a result of a plan for corporate reorganization and reduction of manufacturing inefficiencies, in financial year 2012 the Group expects to be able to generate financial resources through its operations such as to ensure adequate support for investments. The management of liquidity, funding requirements and cash flows are under the direct control and management of the Group Treasury, which operates with the aim of managing the resources available as efficiently as possible. 108 ANNUAL REPORT 2011

110 Tensions on the Italian government bonds market and uncertainties of financial markets have had an effect on the borrowing of banks and as a consequence on credit granted to businesses. This instability could also continue in 2012, preventing the normal execution of financial transactions. Lastly, regardless of the fact that the Group has continued refinancing its debts with the support of its banking counterparties and the financial markets, the situation could arise of having to seek additional financing in less favourable market conditions, with the limited availability of such sources and an increase in financial expenses. Risks relating to fluctuating exchange and interest rates The Group is exposed to exchange rate risks by virtue of the fact that a significant portion of sales and some of the purchases are made in currencies other than the group s functional currency, with trade transactions carried out by companies in the euro area with counterparties that do not belong to the euro area and vice versa. Another aspect of exchange rate risk is the fact that several Group companies present their financial statements in currencies other than the Group s functional currency. Exposure to exchange rate risk with reference to each entity is regularly monitored by the Group Treasury according to a strategy which focuses, in particular, on the balance between purchases and sales in foreign currency and activating, for the remaining non-balanced portion and according to the criteria set by the company policy in terms of the management of financial risks, appropriate initiatives to hedge or reduce the risks identified, using the instruments available on the market. The Group is also exposed to interest rate risks in relation to financial liabilities assumed to fund either normal operations or, where applicable, the Group s expansion by acquisitions. Changes in interest rates may have positive or negative effects on both the financial outcome and on cash flows. The strategy adopted pursues the basic objective of achieving a balance between floating-rate and fixed-rate debt. The interest rate risk on the floating portion is then reduced via specific hedging operations. Credit risk The Group includes among its customers leading international manufacturers of agricultural machinery, construction equipment vehicles, industrial vehicles and light power tools as well as renewable energy producers, and designers and installers of photovoltaic systems. The risk concentration is associated with the size of these customers, which on a global context is on average high, yet balanced by the fact that credit exposure is distributed across a complex network of counterparties active in several geographical areas. The management of credit is designed to prioritise the acquisition of customers of national and international standing for multi-annual supplies; on this basis consolidated historical relationships have been built up with the main customers. Gen- DIRECTORS REPORT ON OPERATIONS 109

111 erally speaking, these relationships are governed by ad hoc supply contracts. Credit control requires periodic monitoring of the main financial and economic data (including the delivery schedules) relating to each customer. Except in special circumstances to do with country or counterparty risk, guarantees are not normally obtained on credit. Receivables are recognised in the accounts net of any writedowns determined by assessing the counterparty s risk of insolvency based on the information available. Country risk Operating at an international level, the Carraro Group is exposed to the risks associated with a high degree of internationalisation. Political instability, changes in legislative provision, changes in import and export rules in the countries where the Group has a presence, can all have a negative effect on our revenue. Environmental risks The Group operates across 15 manufacturing sites in 8 different nations. The manufacturing processes carried out at the Group s industrial sites are essentially mechanical processing of iron and steel and assembly of purchased components. These processes have accessory materials such as packaging, lubricants, paints and solvents. The objective of limiting the impact of emissions into the environment has seen a significant improvement from 2008 onwards through an important investment in moving from solvent-based coatings to water-based paints that reduce atmospheric emissions to zero. Each site operates in compliance with local environmental regulations. Moreover the management pays continual attention to environmental issues adopting all the applications that current technology has made available to reduce the risks of pollution. In specific terms, activities continued to obtain Environmental Certification in accordance with the criteria of Iso in all of the Group s facilities. Particular attention has been paid to increasing the efficiency of processes in order to maximise energy savings. In choices for the allocation of production and in making make/buy decisions the variable of the optimisation of transport has also been considered from a viewpoint of eco-sustainability and the reduction of CO2 emissions in line with the Group s mission. SHARE PERFORMANCE In the first half of 2011, the Carraro share registered a fluctuating trend, in line with the dynamics of main Stock Exchange indicators (Ftse Mib). From May 2011 onwards, this trend decreased to align with market indicators, affected by considerable instability on international financial markets in the second half of the year, 110 ANNUAL REPORT 2011

112 resulting in lower expectations for growth, particularly in eurozone countries. In the last quarter of 2011, Carraro share performance decreased and underperformed compared to main Stock Exchange indicators. The official average price of 2011 was 3.09 euros, with a maximum listing at 4.47 euros on 18 February and a minimum listing at 1.48 euros on 30 December. In the first few months of 2012 the trend reversed and increased, with the share overperforming compared to market indicators (Ftse Mib). max med min /11 04/11 07/11 10/11 12/11 BUSINESS OUTLOOK AND PROJECTIONS FOR 2012 A growth in sales volumes in line with the last part of 2011 is expected for For the Drivelines / Drive Tech, Components / Gear World and Vehicles / Agritalia Business Units, turnover is expected to increase thanks to a steady performance of main reference markets and the acquisition of a further market share, while the performance of the Electronics Business Unit / Elettronica Santerno is expected to decrease as a result of the decline on the Italian market which has not yet recovered from the growth in foreign sales. The increase in production efficiency and the supply chain will have an additional positive impact on profitability. In view of the greater investments needed for production capacity, the net financial position will not improve compared to TRANSACTIONS WITH RELATED PARTIES Transactions with related parties carried out during the period gave rise to relationships of a commercial, financial or advisory nature and were expedited at market terms, in the economic interest of the individual companies involved in the transac- DIRECTORS REPORT ON OPERATIONS 111

113 tions. No transactions were carried out that were atypical or unusual with respect to normal business operations, with the exception of the business combinations mentioned above, and the interest rates and terms applied to and by the companies in their reciprocal financial relationships are in line with market terms. For detailed information, as required by Art bis of the Civil Code, section 5, on transactions carried out with related parties, see the Explanatory Notes to the Individual Financial Statements. STANDARDS USED IN PREPARING THE CONSOLIDATED FINANCIAL STATEMENTS The present financial statements are drawn up in compliance with the International Financial Reporting Standards (Ifrs) issued by the International Accounting Standard Board (Iasb) and endorsed by the European Union in accordance with Regulation no. 1606/2002 and with the provisions issued in implementation of Art. 9 of Italian Legislative Decree no. 38/2005. Furthermore, these financial statements are based on the assumption that the company is a going concern. OTHER INFORMATION With reference to the provisions of Articles 36 and 39 of Consob Order of 29/10/2007 (the so-called «Market Regulations») and of Art Section 15 of the Stock Exchange Regulations we can confirm that the parent company Carraro Spa meets the conditions required by points a), b) and c) of Section 1 of the aforementioned Art. 36 on the subject of accounting situations, bylaws, corporate bodies and administrative and accounting control of its subsidiaries incorporated and regulated in countries that do not belong to the European Union. The group includes 18 companies established and regulated in non-european Union countries, specifically in Argentina, Brazil, China, India, Russia and the United States; of these, six, in Argentina, China, India, and the United States, are significant under the terms of Title VI, Section II of the Issuer Regulations (Consob Order 11971/1999). For more complete disclosure on the system of corporate governance of Carraro Spa and its ownership structures, as required by Art. 123-bis of Legislative Decree 58 of 24 February 1998, (Consolidated Finance Act TUF), see the «Report on Corporate Governance», which can be consulted on the company s website under the investor relations/corporate governance section, prepared under the terms of Arts. 89-bis of the Consob Issuers Regulations. 112 ANNUAL REPORT 2011

114 STATEMENT OF RECONCILIATION OF CONSOLIDATED NET PROFIT/(LOSS) AND SHAREHOLDERS EQUITY WITH THE NET PROFIT/(LOSS) AND SHAREHOLDERS EQUITY OF THE PARENT COMPANY The following statement illustrates the reconciliation of the consolidated net income and shareholders equity as disclosed in the Consolidated Financial Statements and the net income and shareholders equity disclosed in the Financial Statements of Carraro Spa. Item Net profit/(loss) and shareholders equity of Carraro Spa Net profit/(loss) and shareholders equity of subsidiaries Net profit/(loss) for the period Shareholders equity for the period Net profit/(loss) for the previous year Shareholders equity for the previous year 6,054 76,381-6,122 72,377 10, ,929 2, ,315 Aggregate 16, ,310 3, ,692 Elimination of carrying amount of subsidiaries 3, , ,213 Consolidation adjustments 14,904 52,679 6,637 51,965 Profit and shareholders equity 5,242 89,683 10,917 89,444 Recognition of minority interests ,768 3,689 12,002 Group share of net profit/(loss) and shareholders equity 5,036 77,915 7,228 77,442 The information required by Article 79 of the Issuers Regulations (information on the equity investments in the Parent Company Carraro Spa and its subsidiaries held by directors, statutory auditors and omitted ) is set forth in a specific statement annexed to the Explanatory Notes to the Financial Statements to which this Report refers. PROPOSAL FOR ALLOCATION OF LOSS FOR FINANCIAL YEAR 2011 Dear Shareholders, The financial statements at 31 December 2011, which we invite you to approve as presented, closed with a profit of 6,054,168 euro which we propose is allocated as follows: 302,708 euro equal to 5% to the Legal Reserve; 5,751,460 to the Extraordinary Reserve This proposal has been evaluated by the Board of Directors in view of the level of debt and requirement to make investments to support future growth. MARIO CARRARO Chairman DIRECTORS REPORT ON OPERATIONS 113

115

116 Consolidated Financial Statements at 31 December 2011 CONSOLIDATED FINANCIAL STATEMENTS 115

117 Consolidated Income Statement A) Revenues from Sales NOTE 31/12/2011 of which nonrecurring 1) Products 906, ,905 2) Services 6,520 3,566 3) Other revenues 11,242 6,277 Total Revenues from Sales 1 924, ,748 B) Operating Costs 1) Purchases of goods and materials 574, ,078 2) Services 163, ,536 3) Use of third-party goods and services 5,375 5,347 31/12/2010 of which nonrecurring 4) Personnel costs 136, , ) Amortisation, depreciation and impairment of assets 33,651 36,431 5.a) depreciation of property, plant and equipment 27,620 28,867 5.b) amortisation of intangible fixed assets 4,507 3,605 5.c) impairment of fixed assets 267 2,318 1,900 5.d) impairment of receivables 1,257 1,641 6) Changes in inventories 20,168 43,701 7) Provision for risks and other liabilities 7,566 8,988 1,515 8) Other income and expenses 4,326 4, ) Internal construction 3,788 4,261 Total Operating Costs 2 892, ,094 2,822 Operating Profit/(Loss) 31,622 14,654 C) Gains/(Losses) on Financial Assets 10) Income from equity investments 13 1,199 11) Other financial income 2, ) Financial costs and expenses 16,460 11,524 13) Net gains/(losses) on foreign exchange 2, ) Value adjustments of financial assets 2 Net Gains/(Losses) on Financial Assets 3 16,909 9,081 Profit/(Loss) Before Taxes 14,713 5,573 15) Current and deferred income taxes 4 9,471 16,490 2 Net Profit/(Loss) 5,242 10,917 16) Minority interests 206 3, Group Consolidated Profit/(Loss) 5,036 7,228 2,924 Earnings (Losses) per Share 5 Basic, for the profit for the period attributable to ordinary shareholders of the parent company Diluted, for the profit for the period attributable to ordinary shareholders of the parent company ANNUAL REPORT 2011

118 31/12/ /12/2010 Net profit/loss for the year 5,242 10,917 Other comprehensive income components: Change in cash flow hedge reserve 645 1,687 Gains/(losses) deriving from translation of financial statements of foreign companies 2,661 5,772 Taxes on other comprehensive income components Other comprehensive income components, net of tax effects 2,946 6,974 Total profit/loss for the year 2,296 3,943 Total comprehensive income attributable to: Parent company shareholders 2,172 1,636 Minority interests 124 2,307 Total profit/loss for the year 2,296 3,943 Consolidated Comprehensive Income Statement Note 31/12/ /12/2010 A) Non-Current Assets 1) Property, plant and equipment 6 211, ,149 2) Intangible fixed assets 7 82,100 81,018 3) Real estate investments ) Equity investments in associates ) Equity investments in associates 167 5) Financial assets 10 5,797 3, ) Loans and receivables 5,277 3, ) Other financial assets ) Deferred tax assets 11 27,515 30,483 7) Trade receivables and other receivables 12 1,582 1, ) Trade receivables 7.2) Other receivables 1,582 1,630 Total Non-Current Assets 329, ,107 B) Current Assets 1) Closing inventory , ,780 2) Trade receivables and other receivables , , ) Trade receivables 133, , ) Other receivables 67,533 49,801 3) Financial assets 10 4,775 4, ) Loans and receivables 2,210 1, ) Other financial assets 2,565 3,090 4) Cash and cash equivalents ,441 44, ) Cash ) Bank current accounts and deposits 100,170 44, ) Other cash and cash equivalents Total Current Assets 504, ,459 Total Assets 833, ,566 Consolidated Statement of Financial Position CONSOLIDATED FINANCIAL STATEMENTS 117

119 Consolidated Statement of Financial Position NOTE 31/12/ /12/2010 A) Shareholders Equity 15 1) Share Capital 23,915 23,915 2) Other Reserves 8,667 17,594 3) Profits/(Losses) brought forward 4) IAS/IFRS first adoption reserve 44,384 44,384 5) Other IAS/IFRS reserves ) Foreign currency translation reserve 4,447 1,853 7) Profit/loss for the year pertaining to the group 5,036 7,228 Group Shareholders Equity 77,915 77,442 8) Minority interests 11,768 12,002 Total Shareholders Equity 89,683 89,444 B) Non-Current Liabilities 1) Financial liabilities , , ) Bonds 1.2) Loans 164, , ) Other financial liabilities 5 2) Trade payables and other payables ) Trade payables 2.2) Other payables ) Deferred tax liabilities 11 5,387 8,667 4) Provision for severance indemnity and retirement benefits 19 16,978 19, ) Provision for severance indemnity 12,381 14, ) Provision for retirement benefits 4,597 4,781 5) Provisions for risks and liabilities 20 3,700 2, ) Provision for warranties 1, ) Provision for legal claims 1,937 1, ) Provision for restructuring and reconversion 5.4) Other provisions Total Non-Current Liabilities 190, ,627 C) Current Liabilities 1) Financial liabilities , , ) Bonds 1.2) Loans 191, , ) Other financial liabilities 3,438 2,082 2) Trade payables and other payables , , ) Trade payables 299, , ) Other payables 35,885 31,721 3) Current taxes payables 18 9,560 15,571 4) Provisions for risks and liabilities 20 13,680 14, ) Provision for warranties 8,742 9, ) Provision for legal claims 984 1, ) Provision for restructuring and reconversion 901 3, ) Other provisions 3, Total Current Liabilities 553, ,495 Total Liabilities 743, ,122 Total Shareholders Equity and Liabilities 833, ,566

120 STATEMENT OF CHANGES IN CONSOLIDATED SHAREHOLDERS EQUITY Balance as at 01/01/2010 Total profit/loss for the year Transactions with shareholders: Allocation of 2009 results Share Capital equity Other reserves: profit/ (loss) IAS/IFRS 1 st adoption reserve Treasury stock acquired Cash flow hedge reserve Foreign currency translation reserve Profit / (loss) for the period Equity of Group Minority interests 23,915 27,130 46,641 44,384 2, ,707 45,856 81,469 15,150 96,619 Total 1,187 4,405 7,228 1,636 2,307 3,943 45,856 45,856 Own share purchase Change in consolidation scope 1,499 1, ,340 Other changes 5,449 5,449 Total transactions of the period Balance as at 31/12/ , ,449 45,856 2, ,232 23,915 27,130 6,163 44,384 3, ,853 7,228 77,442 12,002 89,444 Balance as at 01/01/2011 Total profit/loss for the year Transactions with shareholders: Allocation of 2010 results Share Capital equity Other reserves: profit/ (loss) IAS/IFRS 1 st adoption reserve Treasury stock acquired Cash flow hedge reserve Foreign currency translation reserve Profit / (loss) for the period Equity of Group Minority interests 23,915 27,130 6,163 44,384 3, ,853 7,228 77,442 12,002 89,444 Total 270 2,594 5,036 2, ,296 7,228 7,228 Own share purchase 2,038 2,038 2,038 Change in consolidation scope Other changes Total transactions of the period Balance as at 31/12/2011 6,889 2,038 7,228 1, ,057 23,915 27,130 13,052 44,384 5, ,447 5,036 77,915 11,768 89,683 CONSOLIDATED FINANCIAL STATEMENTS 119

121 Consolidated Statement of Cash Flows Note 31/12/ /12/2010 Profit/(loss) for the year pertaining to the Group 5 5,036 7,228 Profit/(Loss) for the year pertaining to minority interests 206 3,689 Tax for the year 4 9,471 16,490 Profit/(loss) before taxes 14,713 5,573 Depreciation of property, plant and equipment 2 27,620 28,867 Amortisation of intangible fixed assets 2 4,507 3,605 Impairment of intangible assets ,318 Provisions for risks 2 7,566 8,988 of which non-recurring provisions ,515 Provisions for employee benefits 2 5,310 5,485 Net financial income/expense 3 13,959 11,036 Net gains/(losses) on foreign exchange 3 2, Income from equity investments ,199 Net adjustments of financial assets 3 2 Cash flows before changes in Net Working Capital 76,892 63,917 Changes in inventory 13 17,874 43,039 Changes in trade receivables and other receivables 12 13,556 76,868 Changes in trade receivables and other receivables from related parties 4, Changes in trade payables and other payables 17 49,745 86,242 Changes in trade receivables and other receivables from related parties 4, Changes in receivables/payables for deferred taxation 11 1,073 1,479 Use of funds for employee benefits 19 7,694 7,697 Use of risks funds 20 6,995 16,396 Interest received 2, Interest paid 16,363 10,953 Tax consolidation expense and income 4 1,547 Tax payments 4 15,323 4,752 Cash flows from operating activities 51,101 12,629 Investments in PPE and real estate investments 6 23,614 13,926 Disinvestments and other movements in PPE 6 7,932 2,945 Investments in intangible assets 7 5,597 6,629 Disinvestments and other movements in intangible assets 7 9 1,970 Equity investments/divestments Cash flow provided by sale of equity investments 1,200 Effect of forex conversion on equity investments 18 Cash flows from Investing activities 21,103 20,348 Changes in current financial assets 10 2,877 12,272 Changes in current financial assets with related parties 8 Changes in non-current financial assets 10 2, Changes in current financial liabilities 16 44, ,274 Changes in non-current financial liabilities 16 9, ,384 Changes in reserves 15 4, Changes in minority interests Cash flows from financing activities 25,503 23,206 Total cash flows for the period 55,501 9,771 Opening cash and cash equivalents 44,940 54,711 Closing cash and cash equivalents 100,441 44, ANNUAL REPORT 2011

122 EXPLANATORY AND SUPPLEMENTARY NOTES TO THE CONSOLIDATED ACCOUNTS FOR THE YEAR ENDED 31 DECEMBER 2011 Publication of the Consolidated Financial Statements of Carraro Spa and subsidiaries for the year ended 31 December 2011 was authorised by a resolution of the Board of Directors on 15 March Carraro Spa is a joint-stock company registered in Italy at the Padua Companies Register and controlled by Finaid Spa. Carraro Spa is not subject to management and coordination activities under the terms of Art et seq of the Civil Code. The controlling shareholder of Finaid Spa does not direct and coordinate Carraro s operations. More specifically: Finaid is a purely financial holding; Finaid does not issue any directions to Carraro; the Finaid Board of Directors does not approve Carraro s strategic plans or business plans nor does it interfere regularly in its operations; and there are no relationships of a commercial or financial nature between Finaid and Carraro. These financial statements are presented in euro, as this is the currency in which most of the group s operations are conducted. The foreign companies are included in the consolidated financial statements in accordance with the principles described in the notes that follow. Amounts in these financial statements are given in euro thousands, while amounts in the notes are indicated in euro millions (mln). The Carraro Group companies are principally engaged in the manufacture and marketing of drive systems developed for agricultural tractors, construction equipment, material moving machinery, light commercial vehicles and automobiles, and electronic control and power systems. Carraro, as the parent company, has functions of strategic guidance, control and coordination of the four business units (BUs) of the Carraro Group: of the Carraro Group: Drivelines (under the control of Carraro Drive Tech Spa), Gear & Components (under the control of Gear World Spa), Vehicles (Divisione Agritalia, administered by Carraro Spa) and Electronics (under the control of Elettronica Santerno Spa). The consolidated financial statements, besides the BUs, include Carraro International, based in Luxembourg, which carries on the work of financial and treasury management of the Group, as well as business of a commercial nature at the Swiss branch, Carraro Finance, based in Dublin (Ireland), which supports Carraro International in the performance of financial and treasury work, and Carraro Deutschland, based in Hattingen (Germany), a financial holding company which holds 10% of Carraro Drive Tech Spa. 1. Introduction CONSOLIDATED FINANCIAL STATEMENTS 121

123 Reporting criteria and accounting principles The annual consolidated financial statements are drawn up in compliance with the International Financial Reporting Standards (Ifrs) issued by the International Accounting Standard Board (Iasb) and endorsed by the European Union, and with the measures issued implementing Art. 9 of Lgs. Dec. 38/2005. The term Ifrs also includes the revised International Accounting Standards (Ias) and all interpretations of the International Financial Reporting Interpretations Committee (Ifric) previously known as the Standard Interpretation Committee (Sic). These standards are the same as those used for the financial statements as at 31 December 2010, with the exceptions described in the paragraph «Accounting standards, amendments and interpretations adopted since 1 January 2011». The financial statements were prepared assuming that the company is a going concern. 2. Form and content of the financial statements The financial statements have been prepared in accordance with the International Financial Reporting Standards (Ifrs) issued by the International Accounting Standards Board (Iasb) and ratified by the European Union and to this end the figures of financial statements of the consolidated subsidiary companies have been reclassified and adjusted appropriately. This press release contains a number of alternative performance indicators not envisaged by the Ifrs accounting standards: Ebitda (Earnings before Interest, Taxes, Depreciation and Amortisation); Ebit (Earnings before Interest and Taxes); Net Financial Position (the sum of bank borrowing, bonds and short-term and medium/ long-term loans, net of cash and cash equivalents, marketable securities and financial receivables); Gearing (the ratio between net financial position and shareholders equity). 2.1 Format of the consolidated financial statements With regard to the format of consolidated accounting schedules, the Company opted to present the following accounting statements. Income Statement Items on the consolidated income statement are classified by their nature. Statement of Comprehensive Income The consolidated comprehensive income statement includes items of income and costs that are not posted on the period income statement, as required or permitted by the Ifrs, namely changes to the cash flow hedge reserve, changes to the translation reserve and the result of financial assets available for sale. 122 ANNUAL REPORT 2011

124 Statement of Financial Position The consolidated statement of financial position is presented with separate disclosure of Assets, Liabilities and Shareholders Equity. Assets and Liabilities are illustrated in the Consolidated Financial Statements according to their classification as current and non-current. Statement of Changes in Shareholders Equity The statement of changes in shareholders equity is presented in accordance with the requirements of the international accounting standards, showing the comprehensive income for the period and all changes generated from transactions with shareholders. Statement of Cash Flows The consolidated statement of cash flows illustrates the changes in cash and cash equivalents (as presented in the balance sheet) divided by cash generating area in accordance with the indirect method, as permitted by IAS 7. Accounting statements of transactions with related parties (Consob resolution 15519) With reference to the reporting of related-party transactions in the financial statements, provided for in Consob Resolution of 27 July 2006, balances of a significant amount are specifically indicated, to facilitate understanding of the assets and liabilities, financial position and results of the group, in the table of paragraph 8 below devoted to related party transactions. 2.2 Content of the Consolidated Financial Statements Consolidation scope The consolidated financial statements of the Group include the financial statements of Carraro Spa and companies it directly or indirectly controls. A subsidiary company is an entity in which the Group, directly or indirectly via its own subsidiaries, holds more than half of the voting rights, unless in exceptional cases where it can be clearly demonstrated that this ownership does not constitute control. Control is presumed when the parent company has half, or even less than half, of the votes that can be exercised at meetings of shareholders, if it has: control over more than half of the voting rights under an agreement with other investors; the power to determine the financial and operating policies of the entity under a clause of the articles of association or an agreement; the power to appoint or remove the majority of the members of the board of directors or the equivalent corporate governance body, and control of the entity CONSOLIDATED FINANCIAL STATEMENTS 123

125 is held by that board or body; the power to exercise the majority of voting rights at a meeting of the board of directors or the equivalent corporate governance body, and control of the entity is held by that board or body. The following companies are consolidated using the line-by-line method: Name Based in Currency Par value share capital Parent company Carraro Spa Campodarsego (PD) Euro 23,914,696 Italian subsidiaries: Group stake Carraro Drive Tech Spa Campodarsego (PD) EUR 23,817, % Elettronica Santerno Spa Campodarsego (PD) EUR 2,500, % Energy Engineering Srl Imola (Bologna) EUR 110, % Gear World Spa Padua EUR 35,084, % M.G. Mini Gears Spa Padua EUR 5,256, % Siap Spa Maniago (PN) EUR 17,622, % Foreign subsidiaries: Carraro International Sa Luxembourg EUR 39,318, % Carraro Deutschland GmbH Hattingen (Germany) EUR 10,507, % Carraro Technologies India Pvt. Ltd. Pune (India) INR 18,000, % Carraro Finance Ltd. Dublin (Ireland) EUR 100, % O&K Antriebstechnik GmbH Hattingen (Germany) EUR 4,000, % Carraro Argentina Sa Haedo (Argentina) ARS 105,096, % Carraro China Drive System Qingdao (China) CNY 168,103, % Carraro India Ltd. Pune (India) INR 568,260, % Carraro North America Inc. Norfolk (Usa) USD 1, % Fon Sa Radomsko (Poland) PLN 47,868, % Carraro Drive Tech Do Brasil Santo Andrè (State of Sao Paulo) BRL 267, % Eletronica Santerno Industria e Comercio Ltda Minas Gerais (Brazil) BRL 2,443, % Elettronica Santerno Espana S.L. Valencia (Spain) EUR 1,003, % Santerno Inc. San Francisco (Usa) USD 1, % Zao Santerno Moscow (Russia) RUB 100, % Mini Gears Shangai Trading Ltd Shanghai (China) CNY 1,655, % Turbo Gears India Ltd. Pune (India) INR 550,000, % Mini Gears Inc Virginia Beach (Usa) USD 8,910, % Gear World North America Inc. Virginia Beach (Usa) USD 20, % Mini Gears Property Virginia Beach (Usa) USD 20, % MiniGears Suzhou Co. Ltd. Suzhou (China) CNY 35,222, % 124 ANNUAL REPORT 2011

126 Changes in the consolidation scope Carraro Qingdao Trading Co. Ltd. On 27 December 2011, Carraro Qingdao Trading Co. Ltd, controlled by Carraro Drive Tech Spa, was liquidated. 3.1 Consolidation criteria The figures are consolidated using the line by line method, that is assuming the entire amount of the assets, liabilities, costs and earnings of the individual companies, regardless of the stock held in the company. Foreign companies are consolidated using financial statement formats in line with the layout adopted by the parent company and compiled in accordance with common accounting standards, as applied for Carraro Spa. Where necessary, to achieve alignment with the reporting dates of the foreign companies, infra-annual financial statements as at 31 December 2011 have been provided by the directors, with the same criteria as those for year-end statements. The carrying amount of consolidated equity interests, held by Carraro Spa or by other companies within the consolidation scope, was offset by the relevant amount of shareholders equity in the subsidiary companies. The amount of shareholders equity and the net profit/(loss) of these third-party shareholders are shown in the Consolidated Statement of Financial Position and Income Statement respectively. Payable and receivables, income and expenditure and all operations undertaken between the companies included within the consolidation scope have been eliminated, including dividends distributed within the Group. Profits not yet realised and capital gains and losses deriving from operations between companies of the Group have also been eliminated. Intra-group losses that indicate impairment are recognised in the consolidated financial statements. Balances in foreign currencies have been converted into euro using the exchange rate of the end of the period for assets and liabilities, historical exchange rates for shareholders equity items and average exchange rates in the period for the income statement. Exchange differences resulting from this conversion method are shown in a specific shareholders equity item entitled «Foreign currency translation reserve». The exchange rates applied for the translation of balances presented in foreign currencies were as follows: 3. Consolidation criteria and accounting principles Currency Average exchange rate for 2011 Exchange rate as at 31/12/2011 Average exchange rate for 2010 Exchange rate as at 31/12/2010 Indian Rupee Polish Zloty US Dollar Chinese Renminbi CONSOLIDATED FINANCIAL STATEMENTS 125

127 Currency Average exchange rate for 2011 Exchange rate as at 31/12/2011 Average exchange rate for 2010 Exchange rate as at 31/12/2010 Argentine Peso Russian Ruble Brazilian Real Discretionary valuations and significant accounting estimates Estimates and assumptions In the application of the Group s accounting standards, the directors have not made decisions based on discretionary evaluations (excluding those which involve estimates) having a significant effect on the values in the financial statements. We present below the key assumptions on the future and other significant sources of uncertainty in the estimates at the reporting date, which could bring about significant changes in the carrying amounts of assets and liabilities within the next financial year. Impairment loss on goodwill Goodwill is examined for any impairment once a year. This test requires an estimate of the value in use of the cash generating unit to which the goodwill is attributed, which in turn is based on an estimate of the anticipated cash flows from the unit and their discounting based on an appropriate discount rate. Deferred tax assets Deferred tax assets are recognised in compliance with Ias 12 and they include retained tax losses, to the extent that it is likely there will be future tax profits to offset these losses with the returns of the temporary differences absorbed. A significant discretionary valuation is required of the directors to determine the amount of the deferred tax assets that can be accounted for. They must estimate the probable timing and the amount of future taxable profits as well as a planning strategy for future taxation. The details are provided in Note 11. Pension funds and other post employment benefits The cost of defined-benefit pension plans is determined using actuarial valuations. The actuarial valuation requires assumptions on the discount rates, the expected rate of return on investments, future salary increments, mortality rates and future pension increases. Because of the long-term nature of these plans, these estimates are subject to a significant level of uncertainty. Further information is provided in note ANNUAL REPORT 2011

128 Development costs Development costs have been capitalised based on the following accounting principle. In order to determine the amounts to be capitalised the directors must develop assumptions on anticipated future cash flows from assets, the discount rates to apply and the periods of manifestation of the anticipated benefits (see Note 7). Provisions for risks and liabilities The Group used estimates for the valuation of the provisions for credit risks, for work under warranties granted to customers, for company restructuring, for stock depreciation and for other risks and liabilities. Further details are provided in the notes relating to the individual financial statement items. 3.3 Accounting standards and measurement criteria Accounting standards, amendments and interpretations adopted since 1 January 2011 Ias 24 Revised (2009): Related Party Disclosures On 4 November 2009, Iasb issued a revised version of Ias 24 which simplifies the type of information requested in case of transactions with related parties, controlled by the State, and it clarifies the definition of related parties. As requested, the principle must be applied from 1 January The adoption of said change did not produce any effect on the evaluation of the financial statement items, nor on related party disclosures, included in these Financial Statements. Accounting standards, amendments and interpretations not relevant or not yet applicable and not adopted in advance by the Group Amendment to Ias 32 Financial instruments: classification of rights issues. Ifric 14 Prepayments of a Minimum Funding Requirement. Ifric 19 Extinguishing Financial Liabilities with Equity Instruments. Amendment to Ifrs 7 Financial Instruments: Disclosures (applicable from 1 July 2011). Amendment to Ifrs 1 First-time Adoption of International Financial Reporting Standards (Ifrs) ( forward-looking application from 1 July 2011). The Iasb also issued a series of changes to the Ifrss (improvements). The ones listed below are those indicated by the Iasb as improvements that entail a change in the presentation, recognition and measurement of financial statement items, leaving aside instead those that will determine only terminological changes or those that refer to issues not present in the Group. CONSOLIDATED FINANCIAL STATEMENTS 127

129 Amendment to Ias 12 Income Taxes (endorsement process not completed). Amendment to Ias 1 Presentation of Financial Statements Statement of Comprehensive Income (endorsement process not completed). Ifrs 10 Consolidated Financial Statements (endorsement process not completed). Ias 27 Consolidated and Separate Financial Statements (endorsement process not completed). Ias 28 Investments in Associates (endorsement process not completed). Amendment to Ias 19 Employee Benefits (endorsement process not completed). Ifrs 11 Joint arrangements (endorsement process not completed). Ifrs 12 Disclosure of interests in other entities (endorsement process not completed). Ifrs 13 Fair Value Measurement (endorsement process not completed). Business Combinations and Goodwill Business combinations are accounted for according to the purchase method. This requires the recognition at fair value of the identifiable assets (including intangible fixed assets previously not recognised) and identifiable liabilities (including potential liabilities and excluding future restructuring) of the business acquired. The goodwill acquired through a business combination is initially measured at cost, represented by the amount by which the cost of the business combination exceeds the share attributable to the Group of the net fair value of the identifiable assets, liabilities and potential liabilities (of the business acquired). In order to analyse appropriateness, goodwill acquired in a merger is allocated at the date of acquisition, to the individual cash generating units of the Group or to groups of cash generating units, which should benefit from the synergies of the combination, irrespective of whether other Group assets or liabilities are allocated to such units or groups of units. Each unit or group of units to which the goodwill is allocated: represents the lowest level, within the Group, at which the goodwill is monitored for internal management purposes; and is no larger than the business segments identified on the basis of the Group s primary or secondary schedule of presentation of the segment reporting, determined on the basis of the indications of Ias 8 Operating Segments. When the goodwill represents part of a cash generating unit (or group of cash generating units) and part of the asset internal to that unit is transferred, the goodwill associated with the asset transferred is included in the carrying amount of the asset in order to determine the profit or loss generated by the transfer. Goodwill transferred in such cases is calculated on the basis of the values relating to the asset transferred and of the portion of the unit maintained in existence. 128 ANNUAL REPORT 2011

130 When the transfer concerns a subsidiary, the difference between the selling price and the net assets plus the accumulated translation differences and goodwill is recognised in the income statement. Acquisitions of additional equity interests after achieving control Ias 27 (2008) states that, once control of an entity has been obtained, transactions in which the controlling entity buys or sells further minority interests without affecting the control exercised over the subsidiary are transactions with owners and therefore must be recognised in shareholders equity. It follows that the carrying amount of the controlling and the minority interests must be adjusted to reflect the change in the equity investment in the subsidiary and any difference between the amount of the adjustment made to the minority interests and the fair value of the price paid or received in this transaction is recognised directly in shareholders equity and is attributed to the owners of the parent company. There will be no adjustments to the value of goodwill and profits or losses recognised in the income statement. Any ancillary expenses deriving from these transactions, moreover, must by recognised in shareholders equity in accordance with the provisions of Ias 32, paragraph 35. Previously, in the absence of a specific Standard or Interpretation on the subject, in the case of acquisition of minority interests in companies already controlled, the Carraro Group had adopted the Parent Entity Extension Method, which involved recognition of the difference between the purchase price and the carrying amounts of assets and liabilities under the item Goodwill. In the case of sale of minority interests without loss of control, instead, the Group recognised the difference between the carrying amount of the assets and liabilities sold and the sales price in the income statement. The measurement criteria and accounting standards are illustrated below for the most significant items. Property, plant and equipment Property, plant and equipment items are recognised at their historical cost, less the related accumulated depreciation and cumulative impairment losses. This cost includes expenses for replacing parts of machinery and plant at the time they are incurred if this is in accordance with the recognition criteria. Depreciation is calculated on a straight-line basis with reference to the estimated useful life of the assets. Property, plant and equipment items are derecognised at the time of sale or once future economic benefits are no longer expected from their use or disposal. Any losses or profits (calculated as the difference between the net income on the sale and the carrying amount) are recognised in the income statement during the year of elimination as above. CONSOLIDATED FINANCIAL STATEMENTS 129

131 The asset s residual value, its useful life and the methods applied are reviewed annually and adjusted if necessary, at the end of each accounting period. On average the useful life, in years, is as follows: Category Useful Life Industrial Buildings Plant Machinery Equipment 3-15 Dies and Models 5-8 Furniture and Fittings 15 Office Machines 5-10 Motor Vehicles 5-15 Assets held in relation to financial lease agreements are depreciated on the basis of the estimated useful life, in a way consistent with owned assets. Real estate investments Real estate investments are recognised at fair value and are not depreciated. Intangible fixed assets Intangible assets are recognised in the accounts only if they can be identified and checked, are expected to generate future economic benefits, and their cost can be reliably determined. Intangible fixed assets with a limited life are carried at purchase or production cost net of amortisation and accumulated impairment losses. Amortisation is calculated in relation to their anticipated useful life and starts when the asset becomes available for use. Goodwill Goodwill represents the surplus of the purchase cost over the acquirer s interest in the fair value (referred to the identifiable net values of the assets or liabilities of the entity acquired). After initial recognition, goodwill is carried at cost, less any cumulative impairment losses. Goodwill is subject, at least once a year, to an impairment test, to identify any impairment losses. In order to perform a correct fair value analysis, the goodwill is allocated to each of the units generating financial flows that will benefit from the effects deriving from the acquisition. Research and development costs The costs of research are charged to the income statement when incurred, in accordance with Ias 38. Again in compliance with Ias 38, development costs relating 130 ANNUAL REPORT 2011

132 to specific projects are recorded among the assets only if all the following conditions are fulfilled: the asset can be identified; it is likely that the asset created will generate future financial benefits; the costs of the development of the asset can be reliably measured. Such intangible assets are amortised on a straight-line basis over their useful lives. Licences, trademarks and similar rights Trademarks and licences are stated at cost, net of amortisation and accumulated impairment losses. The cost is amortised over the shorter of the duration of the contract and the limited useful life. Software The cost of software licences, inclusive of ancillary expenses, is capitalised and recognised net of amortisation and of any accumulated impairment losses. Such intangible assets are amortised on a straight-line basis over their useful lives. Impairment losses Where there are specific signs of impairment, tangible and intangible fixed assets are subject to an impairment test, estimating the recoverable value of the assets and comparing it with their net carrying amount. The recoverable value is the greater of the fair value of an asset net of selling costs and its value in use, which is determined as the present value of the cash flows that the company estimates will derive from the continuous use of the asset and from its disposal at the end of its useful life. This recoverable value is determined for each individual asset except when the asset does not generate cash flows which are fully dependent on those generated by other assets. If the recoverable value is lower than the carrying amount, the latter is reduced accordingly. This reduction represents an impairment loss, which is recognised in the income statement. If there is no longer any reason for an impairment loss previously recognised to be maintained, with the exception of goodwill and of intangible assets with an unlimited useful life, the carrying amount is reinstated to the new value deriving from the estimate, provided that this value does not exceed the net carrying amount which the asset would have had, if no writedown had ever been made. The value written back is also recorded in the income statement. Impairment tests are carried out annually in the case of goodwill and of intangible fixed assets with an unlimited useful life. Impairment tests are also carried out on all assets with independent flows that show evidence of impairment. CONSOLIDATED FINANCIAL STATEMENTS 131

133 Equity investments in associated companies An associated company is an entity over which the Group is able to exercise significant influence, but does not have control or joint control, via the equity investment, over the financial and operating policies of the subsidiary. The income, expenses, assets and liabilities of associated companies are shown in the consolidated financial statements using the net equity method, with the exception of cases that are classified as held for sale. Equity investments in other companies and other securities In accordance with the provisions of the standards Ias 39 and 32, equity investments in companies other than subsidiaries and associates are classified as financial assets available for sale and are carried at fair value except in cases where it is not possible to determine the market price or the fair value: in this case the cost method is used. Profits and losses deriving from value adjustments are recognised in the statement of comprehensive income and accumulated in a specific shareholders equity reserve. In the presence of permanent impairment losses or in the event of a sale, profits and losses recognised up to that moment in shareholders equity are recognised in the income statement. Financial assets Ias 39 envisages the following types of financial instruments: financial assets at fair value through profit or loss, loans and receivables, investments held to maturity and assets available for sale. Initially, all financial assets are recognised at fair value, increased, in the case of assets other than those at fair value through profit or loss, by any ancillary expenses. The Group establishes the classification of its financial assets after initial registration and, where appropriate and permitted, revises the classification at the end of each financial year. All standardised (regular way) purchases and sales of financial assets are recognised at the trade date, or at the date on which the Group undertakes to acquire the asset. Standardised purchases and sales means all purchase/sale transactions on financial assets which require the handing over of the assets in the period generally envisaged by the regulations and by the practices of the market on which the trade occurs. Financial assets at fair value through profit or loss This category comprises financial assets held for trading, that is, all assets acquired for the purpose of sale in the short term. Derivatives are classified as financial instruments held for trading unless they are designated as effective hedging instruments, in which case their accounting treatment is described in the paragraph «Derivative financial instruments and hedging transactions», below. Profits or losses on assets held for trading are recorded in the income statement. 132 ANNUAL REPORT 2011

134 Investments held to maturity Financial assets which are not derivative instruments and which are characterised by payments with fixed or determinable maturities are classified as «investments held to maturity» when the Group has the intention and the capacity to maintain them in the portfolio until maturity. Financial assets that the Group decides to keep in the portfolio for an indefinite period do not fall within this category. Other long-term financial investments which are held to maturity, such as bonds, are subsequently measured using the amortised cost method. This cost is calculated as the value initially recognised, less the repayment of the principal, plus or minus the amortisation accumulated using the effective interest rate method on any difference between the value initially recognised and the amount at maturity. This calculation includes all the fees or points paid between the parties, which form an integral part of the effective interest rate, the transaction costs and other premiums or discounts. For investments measured at their amortised cost, profits and losses are recognised in the income statement at the moment in which the investment is derecognised or in the event of an impairment loss, as well as by means of the amortisation process. Loans and receivables Loans and receivables are non-derivative financial assets with fixed or determinable payments which are not quoted on an active market. These assets are stated on the basis of amortised cost using the effective discount rate method. Profits and losses are recognised in the income statement when the loans and receivables are derecognised or on the occurrence of impairment losses, as well as by means of the amortisation process. Available-for-sale financial assets Available-for-sale financial assets are financial assets, excluding derivative instruments, which are designated as such or not classified in any of the other three previous categories. After initial recognition at cost, financial assets held for sale are carried at fair value and profits and losses are recorded in a separate shareholders equity item until the assets have been derecognised or until it is ascertained that they have suffered an impairment loss. Profits and losses accumulated up to that moment in shareholders equity are then charged to the income statement. In the case of securities widely traded on regulated markets, the fair value is determined by making reference to the stock market price struck at the end of trading on the reporting date. For investments where there is no active market, fair value is determined using valuation techniques based on prices of recent transactions between unrelated parties; the current market value of a substantially similar instrument; discounted cash flow analysis; option pricing models. CONSOLIDATED FINANCIAL STATEMENTS 133

135 Derecognition of financial assets and liabilities Financial assets A financial asset (or, if applicable, part of a financial asset or parts of a group of similar financial assets) is derecognised when: the right to receive the cash flows from the asset has expired; the Company maintains the right to receive cash flows from the asset, but has undertaken a contractual commitment to pay them in full and without delay to a third party; the Group has transferred the rights to receive cash flows from the asset and (a) has essentially transferred all the risks and benefits of the ownership of the financial asset or (b) has not transferred or essentially withheld all the risks and benefits of the asset, but has transferred control of the same. In cases where the Group has transferred the rights to receive cash flows from an asset and has not essentially transferred or withheld all the risks and benefits or has not lost control over the same, the asset is recorded in the Group s financial statements to the extent of the latter s residual involvement in this asset. The residual involvement, which takes the form of a guarantee on the asset transferred, is measured at the lower of the initial carrying amount of the asset and the maximum amount which the Group could be obliged to pay. In cases where the residual involvement takes the form of an option issued and/ or acquired on the asset transferred (including options settled in cash or similar), the extent of the Group s involvement corresponds to the amount of the asset transferred which the company could re-acquire; however, in the case of a put option issued on an asset measured at fair value (including options settled in cash or by means of similar provisions), the extent of the Group s residual involvement is limited to the lower of the fair value of the asset transferred and the exercise price of the option. Financial liabilities A financial liability is derecognised when the underlying obligation is discharged, cancelled or fulfilled. In cases where an existing financial liability is replaced by another of the same lender, under essentially different conditions, or the conditions of an existing liability are essentially changed, this change or amendment is treated as derecognition of the original liability and recognition of a new liability. Any difference between the carrying amounts are recognised in the income statement. Impairment losses on financial assets The Group assesses whether a financial asset or group of financial assets has undergone a loss in value at the end of each accounting period. Assets measured on the basis of amortised cost If there is objective evidence that a loan or receivable recognised at amortised 134 ANNUAL REPORT 2011

136 cost has suffered an impairment loss, the amount of the loss is measured as the difference between the carrying amount of the asset and the present value of the estimated future cash flows (excluding future receivable losses not yet incurred) discounted at the original effective interest rate of the financial asset (that is the effective interest rate calculated at the date of initial recognition). The carrying amount of the asset is reduced both directly and by setting aside provisions. The amount of the loss will be recognised in the income statement. The Group assesses first of all the existence of objective evidence of impairment at the individual level. In the absence of objective evidence of an impairment loss for a financial asset measured individually, whether significant or otherwise, this asset is included in a group of financial assets with similar credit risk features and the group is subject to assessment for impairment losses in a collective manner. Assets assessed at the individual level, for which an impairment loss is seen or continues to be seen, will not be included in collective valuation. If, in a subsequent accounting period, the amount of an impairment loss decreases and this reduction can objectively be traced back to an event which took place after the impairment loss was recognised, the value previously written down is reinstated. Any subsequent write-backs are recognised in the income statement, provided that the carrying amount of the asset does not exceed the amortised cost at the date of the reversal. Assets recognised at cost If objective evidence exists of the loss in value of an unlisted instrument representing equity which is not recognised at fair value because its value cannot be measured reliably, or of a derivative instrument which is linked to this equity instrument and must be settled by means of the consignment of the instrument, the amount of the impairment loss is given as the difference between the carrying amount of the asset and the present value of the expected future cash flows and discounted at the current market rate of return for a similar financial asset. Available-for-sale financial assets In the event of an impairment loss of an available-for-sale financial asset, a value equal to the difference between its cost (net of repayment of the principal and amortisation) and its current fair value, net of any losses in value previously recognised in the income statement, is transferred from the statement of comprehensive income to the income statement. Writebacks relating to equity instruments classified as available for sale are not recognised in the income statement. Writebacks relating to debt instruments are recognised in the income statement if the increase in the fair value of the instrument can be objectively traced back to an event which took place after the loss was recognised in the income statement. CONSOLIDATED FINANCIAL STATEMENTS 135

137 Inventories Inventories are measured at the lower of the average purchase or production cost for the period, and market value. Production cost includes materials, labour and direct and indirect manufacturing costs. Obsolete or slow-moving stocks are written down appropriately, as well as in consideration of their anticipated future use and their realisation value. Trade receivables and other receivables Trade receivables and other receivables are included among current assets, with the exception of those falling due more than 12 months after the reporting date, which are classified as non-current assets. These assets are valued at amortised cost on the basis of the effective interest rate method. Receivables which mature at more than one year, are interest-free or that earn less interest than the market, are discounted using market rates. Trade receivables are discounted when they have longer payment terms than the average term of extension granted. If there is objective evidence of elements indicating an impairment loss, the asset is reduced by an amount that returns the discounted value of the cash flows obtainable in the future. Impairment losses are recognised in the income statement. Where reasons for previous writedowns are not maintained into subsequent trading periods, the value of the asset is reinstated until it corresponds to the value that would have derived from application of the amortised cost. Cash and cash equivalents Cash and cash equivalents include cash on hand and cash deposits and investments maturing within three months of the original date of acquisition. Loans and bonds Loans are initially recognised at the fair value of the price received net of the related loan acquisition costs. After initial recognition, loans are carried on the basis of their amortised cost calculated by means of the application of the effective interest rate. The amortised cost is calculated taking into account the issue costs and any discounts or premium provided for at the time of settlement. Allowances and provisions Provisions for risks and liabilities Provisions for risks and liabilities are made when the Group must meet a current legal or implicit obligation deriving from a past event, a sacrifice of resources is likely in order to deal with this obligation and it is possible to make a reliable estimate of its amount. When the Group considers that a provision for risks and liabilities will be partly or fully reimbursed, for example in the case of risks covered by insurance policies, the indemnity is recognised separately among the assets if, and only 136 ANNUAL REPORT 2011

138 if, it is practically certain. In this case, the cost of the possible related provisions, net of the amount recognised for the indemnity, is presented in the income statement. If the effect of discounting to the present the value of the money is significant, the provisions are discounted back using a pre-tax discount rate which reflects, where appropriate, the specific risks of the liabilities. When the discounting is carried out, the increase of the provision due to the passage of time is recognised as a financial expense. Employee and similar benefits According to Ias 19, employee benefits to be paid out subsequent to the termination of the employment relationship and other long-term benefits (including the Provision for severance indemnity) are subjected to actuarial valuations which have to take into account a series of variables (such as mortality, the provisions of future salary changes, the anticipated rate of inflation, etc.). Following this method, the liability recognised represents the current value of the obligation, net of any plan assets, adjusted for any actuarial losses or profits not accounted for. The actuarial losses and profits are recognised directly in the income statement, without taking advantage of the corridor approach. Revenue recognition Sales of goods are recognised when the goods are shipped and the company has transferred to the purchaser the significant risks and rewards associated with ownership of the goods. Revenues for services are recognised with reference to the stage of completion. Interest income is recognised in accordance with the accruals concept, on the basis of the amount financed and the effective interest rate applicable, which represents the rate that discounts future collections estimated over the expected life of the financial asset so as to take them back to the carrying amount of the asset itself. Revenues from dividends are recorded when the right to collection arises, which normally corresponds to the resolution of the shareholders meeting approving distribution of the dividends. Dividends to shareholders are recognised as payable at the time of the distribution resolution. Public grants Public grants are recognised when reasonable certainty exists that they will be received and all the related conditions are satisfied. When the grants are associated with cost elements, they are recorded as revenues, but they are systematically spread over the accounting periods so that they are commensurate with the costs they are intended to offset. If the grant is linked to an asset, the fair value is suspended in long-term liabilities and the release to the income statement takes place progressively over the expected useful life of the asset concerned on a straight-line basis. CONSOLIDATED FINANCIAL STATEMENTS 137

139 Taxes Taxation for the year represents the sum total of the current and deferred income taxes. Current taxes Current income taxes have been provided for on the basis of an estimate of the taxable income for the consolidated companies, in accordance with the provisions issued or essentially issued at the reporting date and taking any applicable exemptions into account. Deferred taxes Deferred taxes are determined on the basis of the taxable temporary differences existing between the carrying amount of assets and liabilities and their value for tax purposes; they are classified under non-current assets and liabilities. Deferred tax assets are provided for only to the extent that future tax burdens will probably exist, against which this asset balance can be used. The value of deferred tax assets which can be recognised is subject to an annual assessment and is written down to the extent that it is not likely that sufficient income for tax purposes will be available in the future so as to permit all or part of this credit to be used. Unrecognised deferred tax assets are reviewed annually at the reporting date and are recognised to the extent that it has become likely that income for tax purposes will be sufficient to permit these deferred tax assets to be recovered. Deferred tax assets and liabilities are determined with reference to the tax rates which are expected to be applied in the period in which these deferments will be realised, taking into account the rates in force or those which it is known will be subsequently issued. Deferred tax assets and liabilities are offset, if a legal right exists to offset the current tax assets with current tax liabilities and the deferred taxes refer to the same fiscal entity and the same tax authority. Value added tax Revenues, costs and assets are recognised net of value added tax, except when: the tax applied to the purchase of goods or services is non-deductible, in which case it is recognised as part of the purchase cost of the asset or part of the cost item recognised in the income statement; it refers to trade receivables and payables recorded including the value of the tax. Earnings or losses per share Basic earnings (losses) per share are calculated by dividing the net profit (net loss) for the period attributable to ordinary shareholders of the Company by the weighted average number of ordinary shares outstanding in the period. Diluted earnings (losses) per share are obtained by means of adjustment of the 138 ANNUAL REPORT 2011

140 weighted average of outstanding shares, so as to take into account all the potential ordinary shares with diluting effects. Translation of foreign currency balances Functional currency The companies of the Group provide their financial statements in the currency used in the individual country. The Group s functional currency is the euro, which represents the currency in which the separate financial statements are drawn up and published. Accounting transactions and entries Transactions carried out in a foreign currency are initially recognised using the exchange rates at the transaction date. At the reporting date, the monetary assets and liabilities denominated in a foreign currency are re-translated on the basis of the exchange rate in force at that date. Non-monetary foreign currency items measured at historical cost are translated using the exchange rate in force at the date of the transaction. Non-monetary items recognised at fair value are translated using the exchange rate in force at the date of determination of the value. Derivative financial instruments and hedging transactions The Company s financial risk management strategy conforms to the company objectives set out in the policies approved by the Board of Directors of Carraro Spa. In particular, it aims to minimize interest rate and exchange rate risk and optimize the cost of debt. These risks are managed in accordance with the principles of prudence and market best practices and all risk management transactions are centrally managed. The main objectives indicated by the policy are as follows: Exchange-rate risks: to hedge all commercial and financial transactions against the risk of fluctuation; to apply the currency balancing method of hedging the risk, where possible, favouring the offsetting of revenues and expenses and payables and receivables in foreign currencies in order to engage in hedging solely for the excess balance not offset; not to permit the use and ownership of derivatives or similar instruments for mere trading purposes; to permit only the use of instruments traded on regulated markets for hedging transactions. CONSOLIDATED FINANCIAL STATEMENTS 139

141 Interest-rate risks: to hedge financial assets and liabilities against the risk of changes in interest rates; in hedging against risk, to comply with the general criteria for balancing lending and borrowing set at the Group level by the Board of Directors of Carraro Spa when it approves long-term plans and budgets (fixed and floating interest rates, proportions at short-term and medium/long-term); to permit only the use of instruments traded on regulated markets for hedging transactions. The Group uses derivative financial instruments such as currency futures contracts and interest rate swaps to hedge the risks deriving mainly from fluctuations in interest and exchange rates. These derivative financial instruments are initially recognised at their fair value at the date they were entered into; this fair value is periodically reviewed. They are accounted for as assets when the fair value is positive and as liabilities when it is negative. Any profits or losses emerging from the changes in the fair value of derivatives not eligible for hedge accounting are charged directly to the income statement during the accounting period. The fair value of currency futures contracts is determined with reference to the current forward exchange rates for contracts with a similar maturity profile. The fair value of interest rate swap agreements is determined with reference to the market value for similar instruments. For hedge accounting purposes, hedges are classified as: fair value hedges, if they hedge the risk of change in the fair value of an underlying asset or liability; cash flow hedges, if they hedge the risk of change in the cash flows deriving from existing assets and liabilities or from future transactions; hedges of a net investment in a foreign operation (net investment hedges). A transaction hedging the exchange-rate risk relating to an irrevocable commitment is accounted for as a cash flow hedge. When implementing a hedging transaction, the Group formally designates and documents the hedging relationship to which it is intended to apply the hedge accounting, its risk management objectives and the strategy pursued. The documentation identifies the hedging instrument, the element or transaction subject to the hedge, the nature of the risk and the methods by means of which the entity intends to assess the effectiveness of the hedge in offsetting exposure to changes in the fair value of the element hedged or the cash flows attributable to the hedged risk. These hedges are expected to be highly effective in offsetting exposure of the element hedged to changes in the fair value or in the cash flows attributable to the hedged risk. The assessment of whether these changes have effectively shown themselves to be highly effective is carried out on an ongoing basis during the accounting 140 ANNUAL REPORT 2011

142 periods in which they were designated. Transactions which meet the criteria for hedge accounting are accounted for as follows. Fair value hedges The Group resorts to fair value hedging transactions against exposure to changes in the fair value of accounting assets and liabilities or of an off-balance sheet irrevocable commitment, as well as an identified part of the said assets, liabilities or irrevocable commitments, attributable to a particular risk, which could have an impact on the income statement. As far as fair value hedges are concerned, the carrying amount of the element being hedged is adjusted to reflect the profits and losses attributable to the risk subject to the hedge, the derivative instrument is redetermined at fair value and the profits and losses of both are booked to the income statement. With regard to fair value hedges referring to elements recognised on the basis of amortised cost, the adjustment of the carrying amount is amortised in the income statement over the period remaining until maturity. Any adjustments to the carrying amount of the hedged financial instrument to which the effective interest rate method is applied are amortised in the income statement. The amortisation can start as soon as an adjustment exists but not after the date when the hedged element ceases to be adjusted due to the changes in its fair value attributable to the hedged risk. When an unrecognised irrevocable commitment is designated as a hedged item, subsequent cumulative changes in its fair value attributable to the hedged risk are recognised as assets or liabilities and the corresponding profits and losses are recognised in the income statement. Changes in the fair value of a hedging instrument are also booked to the income statement. An instrument is no longer recognised as a fair value hedge when it matures or is sold, discharged or exercised, when the hedge no longer meets the requirements for hedge accounting purposes, or when the Group revokes its designation. Any adjustments to the carrying amount of the hedged financial instrument to which the effective interest rate method is applied are amortised in the income statement. The amortisation can start as soon as an adjustment exists but not after the date when the hedged element ceases to be adjusted due to changes in its fair value attributable to the hedged risk. Cash flow hedges Cash flow hedges are transactions hedging the risk of fluctuations in cash flows attributable to a specific risk, associated with a recognised asset or liability or with a highly likely future transaction which could influence the financial outcome. Profits or losses deriving from the hedging instrument are recognised in the statement of comprehensive income and accumulated in a specific shareholders equity reserve CONSOLIDATED FINANCIAL STATEMENTS 141

143 for the efficient part, while the remaining (inefficient) portion is recognised in the income statement. The profit or loss booked to shareholders equity is reclassified in the income statement during the period when the transaction being hedged influences the income statement (for example, when the financial income or expense is recognised or when an anticipated sale or purchase takes place). When the element being hedged is the cost of a non-financial asset or liability, the amounts recognised in shareholders equity are transferred at the initial carrying amount of the asset or liability. If the transaction is no longer expected to take place, the amounts initially accumulated in shareholders equity are transferred to the income statement. If the hedging instrument matures or is sold, cancelled or exercised without being replaced, or if its designation as a hedge is revoked, the amounts previously accumulated in shareholders equity remain recognised therein until the expected transaction takes place. If it is believed that this will no longer happen, the amounts are transferred to the income statement. Hedges of a net investment in a foreign operation Hedges of a net investment in a foreign operation, including hedges of a monetary item recognised as part of a net investment, are recognised on a similar basis to cash flow hedges. Profits or losses deriving from the hedging instrument are recognised in the statement of comprehensive income and accumulated in a specific shareholders equity reserve for the efficient part of the hedge, while for the remaining (inefficient) portion they are recognised in the income statement. On disposal of the foreign operation, the cumulative value of these profits or losses booked to shareholders equity is transferred to the income statement. Credit risk The Group includes among its customers leading international manufacturers of agricultural machinery, construction equipment vehicles, industrial vehicles and light power tools as well as renewable energy producers, and designers and installers of photovoltaic systems. The concentration of the risk is associated with the size of these customers, which on a global context is on average high, yet balanced by the fact that the credit exposure is distributed across a complex network of counterparties who are active in several geographical areas. The management of credit is designed to prioritise the acquisition of customers of national and international standing for multi-annual supplies; on this basis consolidated historical relationships have been built up with the main customers. Generally speaking, these relationships are governed by ad hoc supply contracts. Credit control requires periodic monitoring of the main financial and economic data (including the delivery schedules) relating to each customer. Except in special circumstances to do with country or counterparty risk, guarantees are not normally obtained on credit. 142 ANNUAL REPORT 2011

144 Receivables are recognised in the accounts net of any writedowns determined by assessing the counterparty s risk of insolvency based on the information available. Liquidity risk The Group s liquidity risk is mainly linked to the activation and maintenance of sufficient funding to support industrial operations. The raising of funds, consistent with the Group s short- and medium-term development plans, is intended to finance both the working capital and investments in fixed assets necessary to ensure sufficient and technologically advanced production capacity. This requirement is directly proportional to the trend in customer orders and the consequent trend in business volumes. The cash flows envisaged for financial year 2012 include, besides the trend in working capital and investments, the effects of current liabilities and the short-term portions of medium- and long-term loans reaching maturity, as well as the effects (assuming the same rates of exchange with respect to 31/12/2011) of the closure of derivative financial instruments on currencies in existence at the reporting date. The Group envisages meeting the needs arising from all of the above with the flows deriving from operations, from available liquidity and from the availability of the above credit facilities. Considering the positive trend of sales volumes, which should be maintained also in subsequent years, and as a result of a plan for corporate reorganization and reduction of manufacturing inefficiencies, in financial year 2012 the Group expects to be able to generate financial resources through its operations such as to ensure adequate support for investments. The management of liquidity, funding requirements and cash flows are under the direct control and management of the Group Treasury, which operates with the aim of managing the resources available as efficiently as possible. Tensions on the Italian government bonds market and uncertainties of financial markets have had an effect on the borrowing of banks and as a consequence on credit granted to businesses. This instability could also continue in 2012, preventing the normal execution of financial transactions. Lastly, regardless of the fact that the Group has continued refinancing its debts with the support of its banking counterparties and the financial markets, the situation could arise of having to seek additional financing in less favourable market conditions, with the limited availability of such sources and an increase in financial expenses. The maturity features of the Group s liabilities and assets are shown in notes 10 and 16 relating respectively to non-current financial receivables and non-current financial payables. The maturity features of derivative financial instruments are described in paragraph 9.2. CONSOLIDATED FINANCIAL STATEMENTS 143

145 Exchange-rate risk and interest rate risk The Group is exposed to exchange rate risks by virtue of the fact that a significant portion of sales and some of the purchases are made in currencies other than the group s functional currency, with trade transactions carried out by companies in the euro area with counterparties that do not belong to the euro area and vice versa. Another aspect of exchange rate risk is the fact that several Group companies present their financial statements in currencies other than the Group s functional currency. Exposure to exchange rate risk with reference to each entity is regularly monitored by the Group Treasury according to a strategy which focuses, in particular, on the balance between purchases and sales in foreign currency and activating, for the remaining non-balanced portion and according to the criteria set by the company policy in terms of the management of financial risks, appropriate initiatives to hedge or reduce the risks identified, using the instruments available on the market. The Group is also exposed to interest rate risks in relation to financial liabilities assumed to fund either normal operations or, where applicable, the Group s expansion by acquisitions. Changes in interest rates may have positive or negative effects on both the financial outcome and on cash flows. The strategy adopted pursues the basic objective of achieving a balance between floating-rate and fixed-rate debt. The interest rate risk on the floating portion is then reduced via specific hedging operations. Intra-group transactions In accordance with the Consob recommendations of 20 February 1997 (Dac / ) and 27 February 1998 (Dac / ) we can confirm that: intra-group transactions and transactions with related parties which took place during the period, gave rise to trade, financial or consultancy-related relationships, and were carried out under market terms, in the financial interest of the individual companies involved in the transactions; no atypical or unusual operations were implemented as compared with normal business management; the interest rates and terms applied (paid and received) in financial relationships between the various companies are in line with normal market terms. 144 ANNUAL REPORT 2011

146 Information on Operating Segments is given on the basis of the internal reporting provided to the highest operating decision-making level. For operational purposes, the Group manages and controls its business on the basis of the type of products supplied. Four operating segments were identified, corresponding to the following Business Units: Drivelines: production and marketing of axles, transmissions and drives for construction equipment and agricultural applications; Components: production and marketing of components for axles and transmissions, and of gears; Vehicles: production and marketing of agricultural tractors; Electronics: production and marketing of electronic and power systems. The item «other segments» brings together the Groups operations not allocated to the four operating segments, and comprises the central holding and management activities of the Group. The Management examines separately the results achieved by the operating segments in order to take decisions on the allocation of resources and on assessment of the results. The results of the segments are assessed on the basis of the operating profit/(loss) which may differ in some respects from the operating profit/(loss) shown in the consolidated financial statements. 4. Information on business segments and geographical areas 4.1 Business segments The most significant information by business segment is presented in the tables below, with comparisons between financial years 2011 and A. Economic data 2011 Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Revenues from sales 605, ,955 89, ,981 87, ,192 Sales to third parties 590, ,645 85, ,164 1, ,192 Sales between divisions 15,409 63,310 3,875 3,817 86,411 Operating costs 584, ,527 87, ,518 80, ,570 Purch. of goods and materials 442,531 95,129 70,148 53,998 87, ,281 Services 86,184 45,527 7,600 25,387 1, ,697 Use of third-party goods and services 5,981 1, ,057 3,509 5,375 Personnel costs 65,760 37,089 10,235 15,364 7, ,281 Amortisation, depreciation and impairment of assets 12,250 14,490 1,216 3,298 2,398 33,652 Changes in inventories 28,146 3,920 2,931 13, ,168 Provisions for risks 3, ,245 2, ,566 Other income and expenses 2, , ,326 Internal construction , ,788

147 2011 Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Operating profit/(loss) 21,052 2,428 1,783 13,463 7,104 31,622 Gains/(losses) on fin. assets 11,293 5, ,909 Curr. and def. income taxes 6,308 2, , ,471 Minorities Net profit/(loss) 3, ,561 6,215 5, Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Revenues from sales 427, ,045 56, ,895 62, ,748 Sales to third parties 415, ,473 53, , ,748 Sales between divisions 12,163 45,572 2,736 2,111 62,582 Operating costs 430, ,533 59, ,750 58, ,094 Purch. of goods and materials 302,746 74,461 43,372 93,807 63, ,078 Services 68,500 36,194 5,034 26,356 1, ,536 Use of third-party goods and services 5,170 1, ,141 2,846 5,347 Personnel costs 53,698 36,268 9,565 12,599 6, ,103 Amortisation, depreciation and impairment of assets 14,580 15,926 1,163 1,993 2,769 36,431 Changes in inventories 16,380 2, , ,701 Provisions for risks 5, ,250 8,988 Other income and expenses 2,346 1, ,427 Internal construction , ,261 Operating profit/(loss) 3,518 8,488 2,919 33,145 3,566 14,654 Gains/(losses) on fin. assets 6,643 2, ,081 Curr. and def. income taxes 3,010 2, , ,490 Minorities ,317 3,689 Net profit/(loss) 13,091 12,605 3,255 22, ,228 B. Balance sheet 2011 Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Non-current assets * 123, ,654 15,383 38,033 27, ,643 Current assets 296,327 88,601 30,390 67,643 21, ,020 Shareholders equity 35,005 34,412 8,054 47,868 35,656 89,683 Non-current liabilities 27,506 39,195 1,571 1, , ,897 Current liabilities 357, ,648 36,148 56,614 37, ,083 * Non-current assets include goodwill of mln euro relating to the Drivelines BU, goodwill of mln euro relating to the Electronics BU, and goodwill of Euro mln euro attributable to the Components segment. 146 ANNUAL REPORT 2011

148 2010 Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Non-current assets * 126, ,799 15,705 17,526 49, ,107 Current assets 220,006 73,492 18, ,793 13, ,459 Shareholders equity 33,332 35,250 7,075 32,604 18,817 89,444 Non-current liabilities 27,440 83,370 1, , ,627 Current liabilities 286,123 87,671 26,006 97,932 37, ,495 * Non-current assets include goodwill of mln euro relating to the Drivelines BU, goodwill of mln euro relating to the Electronics BU, and goodwill of Euro mln euro attributable to the Components segment. C. Other information 2011 Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Investments (Euro/000) 12,335 9, ,210 2,025 29,211 Workforce as at 31/12 2,291 1, , Drivelines Components Vehicles Electronics Eliminations and items not allocated Consolidated Total Investments (Euro/000) * 8,117 6, ,680 1,624 20,555 Workforce as at 31/12 1,926 1, ,014 * Cancellations and items not allocated included goodwill deriving from entries from consolidation for 1.70 mln euro attributable to the Electronics Business Unit. 4.2 Geographic areas The Group s industrial operations are located in various areas of the world: Italy, other European countries, North and South America, Asia and other non-european countries. The Group s sales, deriving from the manufacturing carried out in the above areas are achieved equally with customers in Europe, Asia and the Americas. The most significant information by geographical area is presented in the tables below. A. Sales The breakdown of sales by main geographic area is shown in the following table. 31/12/ /12/2010 Germany 122,996 99,403 North America 92,358 65,356 South America 75,719 59,257 United Kingdom 74,744 49,211 China 63,371 47,878 France 51,112 30,766 India 50,196 32,850 CONSOLIDATED FINANCIAL STATEMENTS 147

149 31/12/ /12/2010 Switzerland 48,683 36,199 Turkey 41,431 16,202 Poland 17,002 11,374 Sweden 14,673 12,203 Other non-e.u. areas 17,737 14,268 Other E.U. areas 42,144 31,907 Total Abroad 712, ,874 Italy 212, ,874 Total 924, ,748 of which: Total EU area 534, ,738 Total non-eu area 389, ,010 B. Carrying amount of assets by area The following table illustrates the book values of current and non-current assets according to the primary geographic areas of manufacture. 31/12/ /12/2010 Current Assets Non-Current Assets Current Assets Non-Current Assets Italy 322, , , ,120 Other EU countries (Germany, Poland) 248,459 90, , ,823 North America 8,634 7,819 6,786 8,602 South America 47,184 13,838 40,033 13,122 Asia (India, China) 129,258 69,001 86,712 68,745 Non-EU countries Eliminations and items not allocated 252, , , ,377 Total 504, , , ,107 C. Investments by geographical area The table below illustrates the value of investments in the primary geographic areas of manufacture. 31/12/ /12/2010 Italy 16,163 18,127 Other EU countries 2,510 2,005 North America South America Non-EU countries 10,847 6,506 Asia Eliminations and items not allocated 1,040 7,010 Total 29,211 20, ANNUAL REPORT 2011

150 During the year, no non-recurrent costs were recognised in the income statement. Non-recurrent costs of the previous year are shown below. 5. Non-recurring operations 31/12/2010 Personnel Expenses Provisions for Risks Other Inc. and Exp. Provisions for Impair. Ebit Taxes Minorities Net Carraro Spa Carraro Drive Tech Gear World Spa Mini Gears Inc Siap Spa Elettronica Santerno Spa Elettronica Santerno Espana Sl Carraro Argentina Sa Fon 1,000 1,900 2,900 2,900 Total 243 1, ,900 2, ,924 Revenues and costs A. Revenues from sales (note 1) Analysis by business segment and geographical area See the information provided in section 4 above. 6. Notes and comments B. Operating costs (note 2) 31/12/ /12/2010 Purchases of raw materials 545, ,977 Returns of raw materials 4,503 2,671 A) Purchases 541, ,306 Miscellaneous consumables 4,488 5,298 Consumable tools 7,616 5,914 Maintenance material 3,608 3,195 Mat. And serv. For resale 18,034 1,812 Rebates and discounts suppliers B. Other production costs 33,277 15, Purchases of goods and materials 574, ,078 A. External services for production 95,524 74,331 B. Sundry supplies 12,736 11,880 C. General overheads 34,168 29,792 D. Commercial costs 3,284 3,463 E. Sales expenses 17,986 15, Services 163, ,536 CONSOLIDATED FINANCIAL STATEMENTS 149

151 31/12/ /12/ Use of third-party goods and services 5,375 5,347 A. Wages and salaries 94,508 83,284 B. Social security contributions 30,317 26,421 D. Employee severance indemnity and pensions 5,310 5,485 E. Other costs 6,146 3, Personnel costs 136, ,103 A. Deprec. Prop., Plant & Equipment 27,620 28,867 B. Amort. Intangible Assets 4,507 3,605 C. Impairment of fixed assets 267 2,318 D. Impairment of receivables 1,257 1, Amortisation, depreciation and impairment of assets 33,651 36,431 A. Changes in inventories of raw and ancillary materials and goods 19,092 18,864 B. Changes in inventories of work in prog. Semi-fin. & Fin. Prods 1,076 24, Changes in inventories 20,168 43,703 A. Warranty 6,928 7,286 B. Costs of legal claims C. Renovation and conv ,515 D. Other provisions Provision for risks and other liabilities 7,566 8,989 A. Sundry income 7,394 5,748 B. Grants C. Other operating expenses 3,377 3,141 D. Other non-ordinary operating income/expenses 230 1, Other income and expenses 4,326 4, Internal construction 3,788 4,261 C. Net income from financial assets (note 3) 31/12/ /12/ Income from equity investments 13 1,199 A. From financial assets 82 2,329 B. From bank current accounts and deposits C. From other cash equivalents D. Income other than the above 1,945 2,411 E. From fair value changes, interest rate derivatives Other financial income 2, A. From financial liabilities 11,020 6,134 B. From bank current accounts and deposits 4,775 3,626 C. Expenses other than the above 349 2,458 E. From fair value changes, interest rate derivatives Financial costs and expenses 16,460 11,524 From derivative transactions on exchange rates 997 2, ANNUAL REPORT 2011

152 31/12/ /12/2010 From changes in fair value of derivative transactions on exchange rates 1,294 2,355 Other 14,315 8,614 Exchange losses: 16,606 13,053 From derivative transactions on exchange rates 1,143 2,637 From changes in fair value of derivative transactions on exchange rates 228 1,761 Other 12,730 9,411 Exchange gains: 13,645 13, Net gains/(losses. on foreign exchange 2, A. Revaluations B. Impairment Adjustments of financial assets 2 Net gains/(losses. on financial assets 16,909 9,081 Despite a lower average financial debt compared to the previous year, financial expenses went up in absolute terms by million euro (+26.5%) compared to 31 December 2010, due to the increase in the cost of money in the eurozone, in line however with 2010 in terms of the percentage accounting for turnover (1.5%). Exchange differences as at 31 December 2011 were negative by million euro (-0.3% of turnover). In the previous year, exchange differences were positive by 756 thousand euro (0.1% of turnover). The value includes the economic effect of the change in the fair value of derivatives to hedge the exchange risk, equal to million euro as at 31 December 2011 (-0.59 million euro in 2010). Income taxes (note 4) 31/12/ /12/2010 Current taxes 8,586 15,915 Tax consolidation expense and income 1,547 Taxes from previous years 209 1,820 Deferred taxes 1,387 1,140 Provision for tax risks relative to direct taxes 516 1,255 15) Current and deferred income taxes 9,471 16,490 Current taxes Tax on the income of Italian companies is calculated at 27.50%, for Ires (corporation tax), and at 3.90% for Irap (regional business tax) on the respective taxable income for the period. Taxes for the other foreign companies are calculated at the rates in force in the various countries. CONSOLIDATED FINANCIAL STATEMENTS 151

153 Tax consolidation expense and income Carraro Spa, Carraro Drive Tech Spa, Elettronica Santerno Spa and Energy Engineering Srl adhere to the tax consolidation area of the parent company Finaid Spa. The charges/income deriving from the transfer of the Ires taxable base are booked under current taxes. According to the regulations of the Tax Consolidation Agreement, companies of the Carraro Group have the right to relief for use of the tax losses of companies controlled by Finaid, other than those belonging to the Carraro Group. This relief amounts to 3% of the tax losses of the other companies of the Finaid Consolidation area possibly offset with the taxable amounts of Carraro Group companies. The regulations also provide for a mechanism of priority offsetting of the positive and negative taxable amounts between Carraro Group companies with respect to offsetting with the other companies of the Finaid Consolidation. The same mechanism is provided for with reference to the non-deductible expenses as an effect of the Thin Cap Rule. There is also a tax consolidation in place between Gear World Spa and its subsidiaries. Deferred taxes These are set aside on the temporary differences between the carrying amount of the assets and liabilities and the corresponding tax value. The provisions for taxation for the year can be reconciled with the result recorded in the financial statements as follows: 31/12/2011 % 31/12/2010 % Earnings before tax 14,713 5,573 Theoretical tax rate 4, % 1, % Tax effects related to: Non-deductible costs 4, % 3, % Untaxable income % % Unrecognised tax losses 3, % 10, % Other unrecognised deferred taxes 2, % 2, % Change in deferred tax rate % Adjustment of deferred taxes of previous year % % Foreign companies rate difference 2, % % Provisions for tax risks % 1, % Taxes from previous years % 2, % Taxation at effective rate 9, % 16, % As well as taxes recognised in the income statement for the year, deferred tax assets of 0.36 million euro were charged directly to the statement of comprehensive income. The tax rate, still negatively affected by the reduction in deferred tax assets recognised for tax losses to be carried forward, decreased considerably compared to the previous year, due to improved results of various Group companies. 152 ANNUAL REPORT 2011

154 Group earnings or losses per share (note 5) Basic earnings (losses) per share are calculated by dividing the net earnings (net losses) for the year attributable to the company s ordinary shareholders by the weighted average number of outstanding ordinary shares during the year. Earnings 31/12/2011 Euro/000 31/12/2010 Euro/000 Earnings (Losses) for the purposes of calculation of basic earnings per share 5,036 7,228 Diluting effect deriving from potential ordinary shares: Earnings (Losses) for the purposes of calculation of diluted earnings per share 5,036 7,228 Number of shares Weighted average number of ordinary shares for the calculation of basic earnings (losses) per share: 44,237,799 44,285,218 of diluted earnings (losses) per share: 44,237,799 44,285,218 Basic earnings (losses) per share (Euro): Diluted earnings (losses) per share (Euro): Dividends Carraro Spa did not pay dividends in 2011 and Property, plant and equipment (note 6) These items present a net balance of million euro compared with million euro in the previous period. The breakdown is as follows: Items Land and buildings Plant and machinery Industrial equipment Other assets Investiments in progr, and deposits Historical cost 80, , ,337 16,987 7, ,241 Provisions for amort. and impairment 18,844 93,515 57,064 10, ,777 Net as at 31/12/ , ,426 50,273 6,861 6, ,464 Movements in 2010 Increases 205 3,761 3,368 1,305 5,288 13,927 Decreases , ,281 Capitalisation ,846 2,681 Change in consolidation scope Depreciation and amortisation 2,115 3,733 1, ,357 2,168 14,154 10,825 1, ,867 Reclassification ,180 Impairment 2, ,318 Total CONSOLIDATED FINANCIAL STATEMENTS 153

155 Items Foreign exchange translation difference Land and buildings Plant and machinery Industrial equipment Other assets Investiments in progr, and deposits 2,222 3,406 2, ,019 Net as at 31/12/ , ,063 49,253 6,197 7, ,149 Made up of: Historical cost 79, , ,424 18,413 8, ,369 Provisions for amortisation and impairment 19,021 99,362 69,171 12, ,220 Total Items Land and buildings Plant and machinery Industrial equipment Other assets Investiments in progr, and deposits Historical cost 79, , ,424 18,413 8, ,369 Provisions for amort. and impairment 19,021 99,362 69,171 12, ,220 Net as at 31/12/ , ,063 49,253 6,197 7, ,149 Movements in 2011 Increases ,564 7,704 1,565 2,464 23,614 Decreases 3, ,844 Capitalisation 59 2,870 1, ,255 Change in consolidation scope Depreciation and amortisation ,048 14,061 9,886 1,625 27,620 Reclassification 64 8,143 8, Impairment Foreign exchange translation difference 567 1, ,220 Net as at 31/12/ , ,060 39,233 5,894 5, ,938 Made up of: Historical cost 73, , ,013 19,098 6, ,305 Provisions for amortisation and impairment 18, ,859 74,780 13, ,367 Total As at 31/12/2011, there are leased assets registered among plant and machinery for 1.12 million euro. The increase in land and property relates in particular to Carraro Spa, while the decrease relates to the sale of the company branch of Fon Sa. The main investments in plant and machinery were made by O&K GmbH, Siap Spa and Turbo Gears India. The increases in industrial equipment relate mainly to purchases made by Carraro Drive Tech Spa, Elettronica Santerno Spa, MiniGears Spa and Carraro India. The increases in other assets relate mainly to office equipment purchased by Carraro Spa, Elettronica Santerno Spa and Carraro India, and to furniture and furnishings purchased by Elettronica Santerno Spa. The increases in Investments in Progress and Deposits were mainly due to invest- 154 ANNUAL REPORT 2011

156 ments being made in Carraro China Drive System, Carraro Drive Tech and Turbo Gears India. The change in the consolidation scope refers to the company PNH Components coming under the consolidation scope, as indicated in the relative paragraph. The properties of Carraro Spa have mortgage loans secured against them for a total of 17.5 million euro. Intangible assets (note 7) These items present a net balance of 82.1 million euro compared with million euro in the previous period. The breakdown is as follows: Items Goodwill Develop. costs Royal. and patents Licences and Trademarks Invest. in prog. and deposits Other investments Historical cost 62,171 6, ,033 5,347 2,038 95,141 Provisions for amort. and impairment 5, , ,177 Net as at 31/12/ ,171 1, ,013 5,347 1,054 79,964 Movements in 2010 Increases 1, ,168 4,405 6,628 Decreases 2, ,254 Capitalisation of int. costs Depreciation and amortisation 4, , , ,605 Reclassification Forex translation diff Net as at 31/12/ ,171 5, ,188 2, ,018 Made up of: Historical cost 63,171 12,381 1,386 21,227 2,356 1, ,254 Provisions for amort. and impairment 6,649 1,111 12,039 1,437 21,236 Total Items Goodwill Develop, costs Royal, and patents Licences and Trademarks Invest, in prog, and deposits Other investments Historical cost 63,171 12,381 1,386 21,227 2,356 1, ,254 Provisions for amort. and impairment 6,649 1,111 12,039 1,437 21,236 Net as at 31/12/ ,171 5, ,188 2, ,018 Movements in 2011 Increases ,047 3, ,597 Decreases Capitalisation of int. costs Total CONSOLIDATED FINANCIAL STATEMENTS 155

157 Items Goodwill Develop, costs Depreciation and amortisation Royal, and patents Licences and Trademarks Invest, in prog, and deposits Other investments 1, , ,507 Reclassification Forex translation diff Net as at 31/12/ ,171 4, ,639 5, ,100 Made up of: Historical cost 63,171 12,847 1,110 22,985 5,238 1, ,989 Provisions for amort. and impairment 8, ,346 1,462 24,889 Total The item Licences and trademarks includes the fair value of the Brand (3.30 mln euro) and the Technology (3.50 mln euro) recognised in 2007 on acquisition of the company Mini Gears. These intangible fixed assets with a limited useful life are amortised on a straight-line basis over the terms estimated at 10 and 7 years respectively. The other intangible fixed assets with a limited useful life are amortised on a straight-line basis over terms estimated at between 3 and 5 years. Goodwill and Impairment Tests Goodwill Goodwill is attributed to the Cgus (cash generating units) as shown in the following table; the assets of the Cgus were subjected to a specific impairment test as described below. Impairment Tests Impairment tests were carried out, applying the provisions of Ias 36, with the application criteria described below, also considering guidelines on methodologies issued by the Oiv (Italian Valuation Standard Setter): the recoverable value of the assets of the cash generating units (henceforth Cgus) was ascertained by identifying their value in use obtained from the present value of the expected operating cash flows of these assets applying a rate expressing the risks of the single Cgus considered; the Cgus were identified by combining the single elementary entities (companies or facilities) in the main areas of business of the Group, which are the four business units Drivelines, Components, Electronics and Vehicles. The test was also performed at the level of the Group as a whole. This approach is consistent, considering the current business model and the group s strategic and operational organization developed in keeping with this model; with this structure, individual companies come under four business units, each controlling its own financial flows, managing its own customers and suppliers and organised as an autonomous business division with its own organisational responsibili- 156 ANNUAL REPORT 2011

158 ties and reporting system. This structure is reflected also in the organization of segment reporting under the terms of Ifrs 8; the reference time horizon for the estimate of future cash flows is a period of three years, subsequently using the perpetual return criterion; the economic/financial projections used are taken from the Three Year Plan drawn up by the corporate management and approved by the Board of Directors on 22 February 2012, for the period of analytic forecasting; the assumptions are supported both by the size of current order books and by the information available on the production plans of major customers, as well as by forecasts on the performance of the procurement markets and by knowledge of trends in the underlying industrial processes; the terminal value was estimated based on average values of the period, i.e. the last year of the analytical forecast of the Three-Year Plan and the two subsequent years of projections estimated by management. The estimated, forward-looking growth rate ( g ) is equal to zero. The figures of the projections are expressed in real terms; Wacc (weighted average cost of capital) rates were used to discount flows, calculated analysing comparable company data in relation to each business unit, so as to reflect the risk level of each segment of activity, as well as uncertainties related to the current economic context. The rates were determined net of the tax effect. The change in taxes from one year to another is affected, among others, by the change in the cost of money and update to the basket of comparable companies for each segment of activity. the sensitivity analysis was carried out: assuming changes in the parameter of the discount rate, without introducing significant critical issues; identifying the discount rate which reduces to zero the recoverable value and the carrying amount; identifying the change in Ebit which makes the recoverable value equal to the carrying amount. The amounts of goodwill recognised are shown below: Business Unit (CGU) 2010 Changes 2011 O&K Antriebstechnik GmbH & Co. KG. Drivelines 3,000 3,000 Carraro India Ltd. Drivelines 18,079 18,079 Elettronica Santerno Spa Electronics 21,877 21,877 Gruppo Gear World Components 20,215 20,215 Total 63,171 63,171 CONSOLIDATED FINANCIAL STATEMENTS 157

159 The key parameters adopted by the Group, including for the sensitivity analysis, are summarised below: Net Invested Capital at 31/12/2011 Period of explicit forecast (years) * Rate of growth after period of explicit forecast Discount rate net of taxes Discount rate which makes the recoverable value equal to carrying amount Excess of recoverable value over the carrying amount % Change in Ebit which makes the recoverable value equal to carrying amount Gruppo Carraro % 7.51% 11.73% % BU Drivelines % 8.38% 17.1% % BU Components % 6.80% 9.80% % BU Electronics % 6.93% 9.13% % BU Vehicles % 8.78% 27.8 * Reference period of the Three-Year Plan; projections for the two subsequent years are reflected in the terminal value calculation. in the case of the Vehicles BU, the negative value of Net Invested Capital means that sensitivity analysis cannot be applied. Investments in progress and deposits The item mainly refers to the development costs incurred by the companies Carraro Drive Tech Spa and Elettronica Santerno Spa. These expenses derive from the design of new product lines developed in connection with similar projects launched by customers. Development costs generated internally are capitalised at cost. Licences and Trademarks Increases are mainly due to investments by Carraro Spa relative to the new Erp management system. Research and development costs (non-capitalisable) During 2011 research and trials were carried out by some of the personnel employed in both development and production. For these operations in 2011 the Group incurred total expenditure of million euro (not capitalised owing to the lack of the requirements envisaged by Ias 38), (15.95 million euro in 2010). Real estate investments (note 8) These present a net balance of 0.7 million euro. The breakdown is as follows: Items Buildings Total Balance as at 31/12/ Change in currency conversion 3 3 Balance as at 31/12/ Real estate investments refer to non-industrial property owned by Carraro Spa, Siap Spa and Carraro Argentina Sa.

160 Equity investments (note 9) Equity investments in associates As at 31 December 2011 no equity investments were held in associates. The company Carraro PNH Components India Ltd., held % as at 31 December 2010, came under the consolidation scope as from 18 November 2011, as it was merged with the company Carraro India Pvt Ltd. Reference is made in the paragraph on changes to the consolidation scope. Financial assets (note 10) 31/12/ /12/2010 Loans to Third Parties 5,277 3,075 Loans and Receivables 5,277 3,075 Available for Sale Other Financial Assets Other Financial Assets Non-Current Financial Assets 5,797 3,952 From Third Parties 2,210 1,451 Loans and Receivables 2,210 1,451 Fair Value Of Derivates 1,230 2,074 Other Financial Assets 1,335 1,016 Other Financial Assets 2,565 3,090 Current Financial Assets 4,775 4,541 Non-current loans and receivables These are the medium-/long-term portion of the financial receivable from the company Mariv Srl to which the company Stm Srl was sold, amounting to 2.05 million euro. The financial receivable will mature on 30 December The item also includes 3.23 million euro, relative to the medium-/long-term portion of the financial receivable from the company Fon Skb sp. Zo.o. arising from the sale of the company branch of the Polish subsidiary Fabryka Osi Napedowych Sa, on 8 September 2011, which matures on 01 August Other non-current financial assets They include commission paid by Carraro International amounting to 0.39 million euro for the renegotiation of loans under the Framework Agreement with main lending banks, described in note 16, and 0.09 million euro for minority interests and guarantee deposits of Carraro Spa. CONSOLIDATED FINANCIAL STATEMENTS 159

161 Current loans and receivables: They mainly refer to the short-term portion of the financial receivable from Mariv Srl, equal to 1.02 million euro and the remaining financial receivable from the company Stm Srl (equal to 0.39 million euro), which no longer belongs to the Carraro Group. Other current financial assets They include the cash flow hedge derivatives for 1.23 million euro. The amount refers to the fair value calculated as at on current instruments on currencies. As described in detail in the section on derivative financial instruments (Paragraph 9), profits or losses deriving from hedging instruments are recognised in the statement of comprehensive income and accumulated in a specific shareholders equity reserve for the efficient part, while the remaining (inefficient) portion is recognised in the income statement. Deferred tax assets and liabilities (note 11) The table below illustrates the composition of deferred taxation by the nature of the temporary differences that determine it. The change corresponds to the effect of deferred taxes on net equity and income. Description of Differences Assets: Opening 31/12/2010 Reclassif, Economic effect Exchange on income on net difference statement equity Closing 31/12/2011 Amortisation 2,738 2, ,314 Measurement of receivables Measur. of financial assets/liabilities Discount. of employee severance indemn Provisions for risks 9, ,627 Tax losses 12,896 1,314 3, ,883 Other 4,074 2,599 1, ,003 Thin cap Personnel bonuses Total 30,483 1,647 1, ,515 Liabilities: Amortisation 9, , ,224 Measurement of receivables Measur. of financial assets/liabilities Discount. of employee severance indemn Provisions for risks Other Tax losses ANNUAL REPORT 2011

162 Description of Differences Opening 31/12/2010 Reclassif, Economic effect Exchange on income on net difference statement equity Closing 31/12/2011 Thin cap 1,037 1,037 Personnel bonuses Total 8, , ,387 Balance 21,816 1,493 1, ,128 The carrying amount of deferred tax assets recognised as at 31 December 2011 was 27.5 million euro (2010: 30.4 million euro). Deferred tax assets include the potential benefits associated with retained tax losses, insofar as it is likely that there will be adequate future taxable profits against which these losses can be used in a reasonably short period. Tax losses for which it was decided not to recognise deferred tax assets as at 31 December 2011 amounted to 73.0 million euro (2010: 65.1 million euro) with a tax effect of 20.1 million euro (2010: 18.0 million euro). With reference to the tax losses of Carraro Spa and Carraro Drive Tech Spa, which are part of the tax consolidation under Finaid Spa, it should be noted that the deferred tax assets set aside take account of the positive effect of entry into the tax consolidation of Elettronica Santerno Spa from 2011 and the consequent contribution of positive taxable income to the said consolidation. It was also not considered prudent to recognise deferred tax assets with reference to temporarily non-deductible financial expenses for a taxable income of 8.6 million euro (2010: 13.8 million euro), with a tax effect of 2.4 million euro (2010: 3.8 million euro). Tax losses to be carried forward on which no deferred tax assets are recognised: Company Taxable income ( /mln) Tax effect Expiry Siap Spa GW Spa Minigears Spa Minigears VB Turbo Gears without maturity Carraro Drive Tech Spa Carraro Spa Carraro Nord America Fon Santerno Inc Zao Santerno Santerno Shangai Trading Ltd Total CONSOLIDATED FINANCIAL STATEMENTS 161

163 Reportable interest payables on which no deferred tax assets are recognised: Company Taxable income ( /mln) Tax effect Expiry Carraro Drive Tech Spa Carraro Spa Total Trade receivables and other receivables (note 12) 31/12/ /12/2010 Non Current Trade Receivables From Third Parties 1,582 1,630 Other Non-Current Receivables 1,582 1,630 Non-Current Trade & Other Receivables 1,582 1,630 From Related Parties From Third Parties 133, ,244 Current Trade Receivables 133, ,397 From Related Parties 5,470 1,119 From Third Parties 62,063 48,682 Other Current Receivables 67,533 49,801 Current Trade & Other Receivables 201, ,198 Other non-current receivables (1.58 mln euro) consist mainly of guarantee deposits and portions of costs accruing in subsequent periods. Trade receivables bear no interest and mature on average at 60 days. Other current receivables due from third parties can be analysed as follows: 31/12/ /12/2010 VAT credits 33,683 17,844 VAT credits due for rebate 2,152 2,647 Other tax credits 10,606 17,914 Receivables for current taxes 8,601 2,777 Receivables from employees Receivables from pensions agencies Provisions for Impairment of other Receivables Other receivables 5,884 6,255 Other Current Receivables From Third Parties 62,063 48,682 Italian companies earn interest on Vat rebates, if they qualify, at the rate of 2%. The breakdown of trade and other receivables (including provisions for impairment of receivables) by maturity is shown in the following table: 162 ANNUAL REPORT 2011

164 31/12/2011 PAST DUE PAST DUE NOT YET DUE NOT YET DUE Less than 1 year More than 1 year Less than 1 year More than 1 year Total Trade receivables 24, , ,578 Other receivables ,707 1,582 69,401 Total 25, ,613 1, ,979 31/12/2010 PAST DUE PAST DUE NOT YET DUE NOT YET DUE Less than 1 year More than 1 year Less than 1 year More than 1 year Total Trade receivables 18, , ,370 Other receivables ,067 1,629 51,613 Total 19, ,271 1, ,983 The balance of receivables is 207 million euro (189 million euro in 2010). Pastdue receivables as at 31 December 2011 amounted to 25.8 million euro, or 12% of total receivables. As envisaged in Ifrs 7.37 bands of amounts past due were identified. In financial year 2011 past-due receivables amounted to 25.8 million euro, of which 0.7 million euro (0.4% of total receivables) are past due by more than one year. In the same way in 2010, out of a total of 19.8 million euro past due, 0.6 million euro (0.3% of total receivables) were past due by more than one year. An analysis was carried out on specific impairment at the reporting date for past due positions, from which a total impairment loss of 4.2 million euro emerged (4.2 million euro in 2010). The analysis was performed on the basis of the effective recoverability prospects of the positions analysed. Provisions for Impairment of Receivables The breakdown of the gross and net value of the receivables is as follows: 31/12/ /12/2010 Current Trade Receivables due from Third Parties 137, ,217 Provisions for impairment 3,958 3,973 Net Current Trade Receivables from Third Parties 133, ,244 Trade receivables from Related Parties Net Trade Receivables from Related Parties Other receivables from Related Parties 5,470 1,119 Net Other Current Receivables from Related Parties 5,470 1,119 Other current receivables from third parties 62,349 48,864 Provisions for impairment Net Other Current Receivables from Third Parties 62,063 48,682 CONSOLIDATED FINANCIAL STATEMENTS 163

165 Other receivables due from related parties mainly refer to the tax consolidation receivable due from the parent company Finaid Spa. Movements in provisions for impairment for the periods considered can be broken down as follows. 31/12/2010 Increases Decreases Other movem. 31/12/2011 Provisions for impair. of trade receivables 3,973 1,181 1, ,958 Provisions for impair. of other receivables Total 4,155 1,257 1, ,244 Closing inventory (note 13) Items 31/12/ /12/2010 Raw materials 119, ,409 Work in progress and semi-finished products 42,297 37,833 Finished products 58,531 61,150 Goods in transit 1, Total Inventories 221, ,078 Provisions for impairment of inventories 23,460 21,298 Total inventory 197, ,780 The increase in inventories was due to the increase in production volumes, as commented on in the Directors Report on Operations. Movements in provisions for impairment of inventories are shown in detail below: Balance at 31 December ,298 Provisions set aside 6,917 Utilisation 4,625 Translation differences 130 Balance at 31 December ,460 Cash and cash equivalents (note 14) 31/12/ /12/2010 Cash Bank Current Accounts and Deposits 100,170 44,724 Total 100,441 44,940 Short-term bank deposits are remunerated at a floating rate. 164 ANNUAL REPORT 2011

166 Shareholders equity (note 15) 31/12/ /12/ Share Capital 23,915 23, Other Reserves 8,667 17, Profits/(Losses) brought forward 4. Ias/Ifrs first adoption reserve 44,384 44, Other Ias/Ifrs reserves Foreign currency translation reserve 4,447 1, Result for the period pertaining to the Group 5,036 7,228 Group Shareholders Equity 77,915 77, Minority interests 11,768 12,002 The Shareholders Meeting held on 5 May 2011 approved a treasury share purchase and disposal plan involving no more than 5% of the share capital, for a term of 18 months, which provides for: a purchase price per ordinary share no less than 30% lower, and no more than 20% higher than the reference price for the share recorded in the stock exchange session on the day prior to each individual transaction, and a sale price per ordinary share no less than 20% lower, and no more than 20% higher than the reference price for the share recorded in the stock exchange session on the day prior to each individual transaction. The Shareholders Meeting also approved to cover the loss of 2010 of the parent company Carraro Spa, equal to 6,121,605 euro using the Extraordinary Reserve. The company has issued a single category of ordinary shares which do not give the right to a fixed dividend. No other financial instruments which assign equity and investment rights have been issued. As at 31 December 2011, 1,936,401 shares had been purchased for a total investment of 5.42 million euro. Other reserves The item «Other reserves» of million euro, includes the reserves of Carraro Spa relating to profits not distributed or carried forward and others as follows: million euro relating to the Carraro Spa share premium reserve; million euro relating to the Carraro Spa legal reserve; million euro relating to Carraro Spa extraordinary reserve and profits carried forward; less million euro for deduction of the reserve corresponding to own share purchase; less million generated by the reduction of the shareholders equities of consolidated companies with respect to the corresponding carrying amounts of the equity investments and consolidation adjustments. CONSOLIDATED FINANCIAL STATEMENTS 165

167 Ias/Ifrs first adoption reserve The Ias/Ifrs first adoption reserve amounted to million euro as at 31/12/2011. Other Ias/Ifrs reserves This includes the values arising from application of the criterion prescribed for cash flow hedging of million euro. Foreign currency translation reserve This reserve, of million euro, is used to record the exchange differences deriving from translation of the financial statements of foreign subsidiaries. It should be noted that, as required by Ias 1 Revised paragraph 83, the movements in the period of the foreign currency translation reserve were recognised in the statement of comprehensive income, as detailed below: 31/12/2010 Movements of the period 31/12/2011 Exchange reserve of the parent company s shareholders 1,853 2,594 4,447 Exchange reserve of minority interests Effect of the translation reserve on the statement of comprehensive income 2,189 2,661 4,850 Financial liabilities (note 16) As at 31 December 2011, as well as at 30 June 2011, the financial parameters (covenants) foreseen in the Framework Agreement between Carraro Spa and lending banks said date were respected. In particular: gearing (defined as the ratio of net financial position to owners equity) came out at 2.76 as at 31 December 2011 (the Framework Agreement defines for that date a minimum value of the parameter of 2.60, with a margin of tolerance up to 2.99); the Net Financial Position/Ebitda ratio came out at 3.87 as at 31 December 2011 (the Framework Agreement defines for that date a minimum value of the parameter of 3.40, with a margin of tolerance up to 3.91). The classification of financial liabilities is shown below: 31/12/ /12/2010 Medium/Long-Term Loans 164, ,821 Other Non-Current Financial Liabilities 5 Non-Current Financial Liabilities 164, , ANNUAL REPORT 2011

168 31/12/ /12/2010 Medium/Long-Term Loans 85,815 70,957 Loans To Others 11 Short-Term Loans 105,295 76,769 Financial Liabilities 191, ,737 Fair Value Of Interest Rate Derivatives Fair Value Of Exchange Rate Derivatives 1, Other Current Financial Liabilities 1,314 1,222 Other Financial Liabilities 3,438 2,082 Current Financial Liabilities 194, ,819 Short-term loans include current accounts payable and loans taken out during 2011, with a short-term maturity. Medium- and long-term loans are presented below, divided into short-term portion, medium-term portion and portion at more than 5 years. Company UP TO ONE YEAR FROM 1 TO 5 YEARS MORE THAN 5 YEARS Total par value amortised cost effect and exchange delta par value amortised cost effect and exchange delta par value amortised cost effect and exchange delta 31/12/2011 Carraro China Drive Syst. 1,909 2,863 4,772 Carraro India 2, , ,677 Carraro International 71, ,122 1,206 15, ,476 Carraro Spa 1, , , ,898 Fon Sa 1, ,592 MG Mini Gears Spa 7, , ,366 Siap Spa 474 3,526 4,000 Turbo Gears , ,783 Totale 86, ,442-1,414 23, ,564 The following table provides further detailed information on the financial liabilities illustrated above. For an analysis of the maturities of trade payables see Note 17, while a description of how the Group manages liquidity risk can be found in paragraph 3.3. Company Lender Short-term portion as at 31/12/11 Carraro China Drive System Md/lg-term portion as at 31/12/11 Expiry Rate Rate Type Curr. Intesa SanPaolo 1,909 2,863 Jun % Variable Cny Carraro India Exim 86 Mar % Variable Inr Carraro India Exim 437 1,746 Sep % Fixed Inr Carraro India Idbi Bank 450 1,727 Sep % Variable Inr Carraro India Mcc Apr % Variable Euro Carraro India Mcc 321 Apr % Variable Euro Carraro India Axis 327 1,856 Nov % Variable Inr CONSOLIDATED FINANCIAL STATEMENTS 167

169 Company Lender Short-term portion as at 31/12/11 Md/lg-term portion as at 31/12/11 Expiry Rate Rate Type Curr. Carraro International BPV Finance 2,667 17,333 Jun % Variable Euro Carraro International Banca Antonveneta 3,000 7,500 Jun % Variable Euro Carraro International Mps 2,609 6,235 Mar % Variable Euro Carraro International Pool of banks 18,180 81,820 May % Variable Euro Carraro International Carraro International Pool of banks (revolving) Banca Antonveneta (revolving) 27,000 May % Variable Euro 17,600 Dec % Variable Euro Carraro Spa Banca Antonveneta 1,925 15,575 Dec % Variable Euro Fon Capitalia Lux 1, Jun % Variable Euro Siap Friulia 474 3,526 Jun % Variable Euro Mg Mini Gears Spa Banca Pop. Verona 5,057 16,331 Mar % Variable Euro Mg Mini Gears Spa Interbanca 1,000 1,000 Dec % Variable Euro Mg Mini Gears Spa Intesa Mediocredito 632 Sep % Variable Euro Mg Mini Gears Spa Ministero Ricerca 146 Jan % Fixed Euro Mg Mini Gears Spa San Paolo Locat Leasing Mar 12/ May % -2.19% Variable Turbo Gears Mcc 736 2,943 Dec % Variable Euro Turbo Gears Idbi Bank Jan % Variable Inr Turbo Gears Mcc 5,000 Jul % Variable Euro Total 86, ,341 The net financial position is broken down below. Euro 31/12/ /12/2010 Non-current loans payable 164, ,821 Current loans payable 191, ,737 Other non-current financial liabilities 5 Other current financial liabilities 1,314 1,222 Financial liabilities 357, ,780 Non-current loans and receivables 5,277 3,075 Current loans and receivables 2,210 1,451 Other non-current financial assets Other current financial assets 1,336 1,016 Financial assets 9,232 6,305 Cash Bank current accounts and deposits 100,170 44,724 Cash and cash equivalents 100,441 44,940 Net financial position 247, ,535 Of which payables / (receivables) Non-current 159, ,983 Current 88, , ANNUAL REPORT 2011

170 The Group has available short-term banking credit facilities for a total of million euro. These credit facilities are callable and may be used for various currentaccount purposes and short-term financing of a maximum term of 12 months, with the total balance being million euro. The rate terms vary according to the country of usage and can be summarised as follows: Europe (excluding Poland): % Poland: % India: % China: % The medium- and long-term banking credit facilities amounted to a total of million euro, against a utilisation of million euro. Fair Value The fair value of medium/long-term financial liabilities, taking account of the fact that these are almost exclusively for variable-rate funding and that the terms being renegotiated with the banking counterparties are in line with the average levels for the market and the segment even considering the residual volatility of the markets and the relative uncertainty in identifying reference conditions as measured is not significantly different overall from the carrying amounts. Management of capital The Group s main management objective is to ensure that a sound credit rating is maintained, together with adequate levels of the capital indicators so as to support its activities and maximise value for the shareholders. The Group manages and modifies the capital structure in line with changes in the economic conditions. To maintain or change the capital structure, the Group can adjust the dividends paid to the shareholders, redeem the capital or issue new shares. Particular attention is paid to the level of debt in relation to net equity and Ebitda, thereby pursuing the objectives of profitability and the generation of cash for the Group business. As part of the Framework Agreement signed with the lending banks the existing covenants on credit facilities and loans were redefined. Trade payables and other payables (note 17) 31/12/ /12/2010 To Third Parties Other Non-Current Payables Trade Payables and Other Non-Current Payables CONSOLIDATED FINANCIAL STATEMENTS 169

171 31/12/ /12/2010 From Related Parties From Third Parties 299, ,971 Current Trade Payables 299, ,018 From Related Parties 4, From Third Parties 31,296 31,682 Other Current Payables 35,885 31,721 Trade Payables and Other Current Payables 335, ,739 Trade payables do not produce interest and on average are settled at 120 days. Other payables due to third parties can be analysed as follows: 31/12/ /12/2010 Vat payables Other tax payables 656 Amounts due to pensions agencies 6,360 5,472 Amounts due to employees 15,133 13,228 Irpef (personal income tax) employees & professionals 4,262 2,878 Board of Directors 1,325 1,344 Other payables 3,444 8,680 Other Current Payables 31,296 31,682 During the year, the liability for Mbo (Management By Objectives) was reclassified from the item Amounts to employees to Other provisions for risks and liabilities, for a value of 2.99 million euro; this reclassification was considered as the best representation of the company liability in line with reference Ias and Ifrs. The following table shows an analysis of trade and other payables by maturity: 31/12/2011 PAST DUE PAST DUE NOT YET DUE NOT YET DUE Less than 1 year More than 1 year Less than 1 year More than 1 year Total Trade payables 45, , ,410 Other payables , ,963 Total 46, , ,373 31/12/2010 PAST DUE PAST DUE NOT YET DUE NOT YET DUE Less than 1 year More than 1 year Less than 1 year More than 1 year Total Trade payables 39,122 1, , ,018 Other payables , ,054 Total 39,149 1, , , ANNUAL REPORT 2011

172 Current taxes payables (note 18) 31/12/ /12/2010 Current taxes payable 9,560 15,571 Current taxes payable 9,560 15,571 Employee severance indemnities and retirement benefits (employee benefits) (note 19) 31/12/ /12/2010 Opening severance indemnities in accordance with Ias 19 14,583 16,615 Less Stm deconsolidation 684 Utilisation of employee severance indemnities 2,373 2,178 Employee severance indemnities transferred to other companies Employee severance indemnities transferred from other companies Current Service Cost Interest Cost Actuarial Gains/Losses Closing severance indemnities in accordance with Ias 19 12,381 14,583 The severance indemnity, calculated according to current Italian laws, is treated for accounting purposes as a defined-benefit fund and as such is recalculated at the end of each accounting period according to a statistical-actuarial criterion which also takes account of the effects of financial discounting. The severance indemnity refers to employee benefits governed by current Italian laws. The actuarial valuation of this obligation is carried out according to the actuarial criterion of the projected unit credit method with the support of the data issued by Istat, the Inps and the Ania. The parameters used are as follows: annual discount rate: 5%, personnel rotation rate 5%, annual inflation index 2%, advances rate 2%, remuneration increase rate 3%. The accounting treatment of employee benefits recorded in the financial statements complies with Ias 19 for defined-benefit plans; the change in liability noted between the end of the period and the previous one is booked in full to the income statement and classified under personnel costs. Termination benefits are benefits to employees regulated by the laws in force in Italy and recognised in the financial statements of Italian companies. On the basis of the changes introduced in Law 296/06, with effect from 30 June 2007, termination benefits maturing after 1 January 2007 must be paid into a specific treasury reserve established at the pensions agency Inps, or, if the employee so chooses, into a special complementary pension fund. There are no more provisions for termination benefits with these contributions. CONSOLIDATED FINANCIAL STATEMENTS 171

173 Opening 31/12/2010 Increases Decreases Change in currency Closing 31/12/2011 Pension and Similar Funds 4, ,597 Pension and similar funds relate to liabilities recognised in the accounts of the company O&K Antriebstechnik; the actuarial recalculation, except for the structural differences of the relevant plans, follows the same criterion described for the Italian termination benefit provisions. The parameters used as at 31/12/2011 are an annual interest rate of 4.50% and an annual inflation index of 1.0%. The accounting treatment of employee benefits recorded in the financial statements complies with Ias 19 for defined-benefit plans; the change in liability noted between the end of the period and the previous one is booked in full to the income statement and classified under personnel costs. Number of employees The number of employees refers only to the fully consolidated companies and is divided into categories: 31/12/2010 Changes 31/12/2011 Executives Clerical staff ,065 Factory workers 2, ,914 Temporary workers Total as at 31/12 4, ,430 Provisions for risks and liabilities (note 20) The item can be broken down as follows: Non-current portion Opening situation Increases Decreases Reclassif. Exchange -rate adjust. Closing situation 1. Warranty , Costs of legal claims 1, , Renovation and conv. 4. Other provisions Total 2, ,700 Current portion 1. Warranty 9,635 7,128 7, , Costs of legal claims 1, Renovation and conv. 3, , Other provisions , ,053 Total 14,367 7,742 10,226 1, , ANNUAL REPORT 2011

174 From the product warranty reserve, 7.41 million euro was used for customer claims accepted and the reserve was increased by 7.13 million euro on the basis of the expected warranty costs which will be incurred in relation to the sales made. The provision for legal claims mainly comprised 1.08 million euro, to cover an outstanding tax case, concerning property tax, at Carraro Argentina; 0.13 million euro for the tax claim relative to Mini Gears Spa, which is being settled; 0.08 million euro for an outstanding Vat claim relative to Carraro Spa. As regards Carraro Spa, the provision also includes the residual amount of amounts still to pay for the tax assessment of 2009, which was settled in 2010 with payments to be made. The provision for legal claims increased during the period, by 0.5 million euro, in relation to an outstanding claim with the Brazilian tax authorities. The item «Other provisions for risks and liabilities» includes amounts recognised in the individual companies for future expenses and liabilities. The item Other provisions for risks and liabilities, equal to 3.05 million euro, includes the provision for Mbo (Management By Objectives) amounting to 2.99 million euro. This provision was reclassified during the year by 2.86 million euro, which had been recognised under the item Amounts to employees, in the previous year; this reclassification was considered as the best representation of the company liability in line with reference Ias and Ifrs. The detailed movements in provisions for restructuring and reconversion are shown below: Provisions 31/12/10 Increases 2011 Decreases 2011 Reclassif. Exchangerate adjust. Provisions 31/12/2011 Carraro Spa Carraro Drive Tech MG Mini Gears Spa Siap Spa Elettronica Santerno Spa Carraro Argentina Sa Fon Sa 1, O&K Antriebstechnik GmbH 1, Elettronica Santerno Ind. e Com Ltd. MG Mini Gears Inc Gear World Spa Total 3, , The process to relocate surplus staff continued in the year. The initial provision for restructuring, equal to million euro, was increased during 2011 by a total of million euro. Use, equal to million euro, mainly refers to: O&K Antriebstechnik for million euro, Carraro Drive Tech for million euro to complete reorganisation work at the Gorizia and O&K plants; Fon for million euro (against the termination of more than 50 employment contracts and the concurrent disposal of production activities). CONSOLIDATED FINANCIAL STATEMENTS 173

175 7. Commitments and risks There are no commitments and risks such as to have any effect on the financial statements and related disclosure. 8. Transactions with related parties (note 21) The Carraro Group is controlled directly by Finaid Spa, which as at 31/12/2011 held % of the shares outstanding. Carraro Spa, Carraro Drive Tech Spa, Elettronica Santerno Spa and Energy Engineering Srl adhere to the tax consolidation area of the parent company Finaid Spa. The charges/income deriving from the transfer of the Ires taxable base are booked under current taxes. According to the regulations of the Tax Consolidation Agreement, companies of the Carraro Group have the right to relief for use of the tax losses of companies controlled by Finaid, other than those belonging to the Carraro Group. This relief amounts to 3% of the tax losses of the other companies of the Finaid Consolidation area possibly offset with the taxable amounts of Carraro Group companies. The regulations also provide for a mechanism of priority offsetting of the positive and negative taxable amounts between Carraro Group companies with respect to offsetting with the other companies of the Finaid Consolidation. The same mechanism is provided for with reference to the non-deductible expenses as an effect of the Thin Cap Rule. The transactions between Carraro Spa and its subsidiaries which are affiliated entities of Carraro Spa, were eliminated in the consolidated financial statements and are not pointed out in these notes. The details of the transactions between Carraro Group and other affiliated companies according to principle Ias 24 and Consob requirements, are indicated below. Other related parties Trade receiv. and other receiv. Financial and equity transactions Trade payab. and other payab. Sales of products Sales of Purchases services of goods and materials Purchases of services Economic transactions Use of third-party goods and services Financial costs and charges Finaid Srl 5,474 4, ,529 Maus Spa Maus Usa Mgt Srl 1 European Power System Srl ANNUAL REPORT 2011

176 9.1 General summary of the effects on the Income Statement deriving from financial instruments 9. Financial Instruments 31/12/2011 Financial Income A. Financial Assets: A.1 Cash and Cash Equivalents: Financial Expenses Positive Exchange Diff. Negative Exchange Diff. Costs Revenues Bank accounts, positive balance A.2 Non-derivative Financial Instruments: A.2.1 Financial instruments at fair value (FVTPL): A.2.2 Financial instruments held to maturity (HTM): A.2.3 Loans and receivables (L&R): A Loans: Loans receivable A Other assets: Trade receivables - - 7,332-3,826 - Other financial assets 2,017-4, A.2.4 Financial instruments available for sale (AVS): A.3 Derivative Financial Instruments: A.3.1 Hedging derivatives: A Cash Flow Hedging Derivatives on currencies: Fair value through profit or loss Profit realised - - 1, A Cash Flow Hedging Derivatives on interest rates: Fair value in shareholders equity A.3.2 Speculative derivatives (Trading): B. Financial Liabilities B.1 Non-derivative Financial Instruments: B.1.1 Financial instruments at fair value: B.1.2 Other Financial Instruments: Bank accounts, negative balance - -4, Trade payables ,749 - Loans payable - -11, Other financial liabilities ,741 - B.2 Derivative Financial Instruments: B.2.1 Hedging derivatives: B Cash Flow Hedging Derivatives on currencies: Fair value through profit or loss ,294 - Fair value in shareholders equity Loss realised B Cash Flow Hedging Derivatives on interest rates: Loss realised B.2.2 Speculative derivatives (Trading): Total 2,501-16,460 13,645-16, CONSOLIDATED FINANCIAL STATEMENTS 175

177 31/12/2010 Financial Income A. Financial Assets: A.1 Cash and Cash Equivalents: Financial Expenses Positive Exchange Diff. Negative Exchange Diff. Costs Revenues Bank accounts, positive balance 213 A.2 Non-derivative Financial Instruments: A.2.1 Financial instruments at fair value (FVTPL): A.2.2 Financial instruments held to maturity (HTM): A.2.3 Loans and receivables (L&R): A Loans: Loans receivable 165 A Other assets: Trade receivables 3,397 2,013 Other financial assets 110 4,120 A.2.4 Financial instruments available for sale (AVS): A.3 Derivative Financial Instruments: A.3.1 Hedging derivatives: A Cash Flow Hedging Derivatives on currencies: Fair value through profit or loss 1,761 Profit realised 2,133 A Cash Flow Hedging Derivatives on interest rates: Fair value in shareholders equity 304 A.3.2 Speculative derivatives (Trading): B. Financial Liabilities B.1 Non-derivative Financial Instruments: B.1.1 Financial instruments at fair value: B.1.2 Other Financial Instruments: Bank accounts, negative balance 4,375 Trade payables 3 1,713 2,763 Loans payable 7,098 Other financial liabilities 318 3,505 B.2 Derivative Financial Instruments: B.2.1 Hedging derivatives: B Cash Flow Hedging Derivatives on currencies: Fair value through profit or loss 852 2,351 Fair value in shareholders equity 950 Loss realised 1,736 B Cash Flow Hedging Derivatives on interest rates: Loss realised 582 B.2.2 Speculative derivatives (Trading): Total ,524 13,124 12, The source for foreign currency exchange rates is provided by the Ecb and the Bank of Italy for exchange rates with the Argentinian Pesos. 176 ANNUAL REPORT 2011

178 9.2 Derivative financial instruments on currencies The following tables indicate all the key information relating to the portfolio of derivative financial instruments on currencies outstanding as at 31/12/2011. These are instruments designated to cover: foreign currency sales budgets imbalances of current receivables and payables in foreign currencies A. Notional values Contract Carraro Spa Carraro Drive Tech Carraro Argentina Carraro India Carraro Elettronica Int. Santerno Turbo Gears Fon Carraro China Group Total 31/12/2011 Group Total 31/12/2010 Swap (DCS) ,736 5,534 32,120 17,184 2,755 2,075 12,579 69,445 94,646 Swap (DCS) ,142 3,822 7, ,730 6,607 2,588 Total Notional Values 351 2,697 5,221 32,120 20,326 1,067 5, ,309 62,838 92,058 B. Reference currencies and expiry dates of contracts Contratto Swap (DCS) 1 Carraro Spa Carraro Drive Tech Carraro Argentina Carraro India Carraro International Currencies Usd/Eur Usd/Eur Ars/Usd Inr/Eur Inr/Eur Inr/Usd Ars/Usd Cny/Eur Cny/Usd Expiry dates Swap (DCS) 2 Jan -Feb 12 Jan -Jul 12 Jan -Dec 12 Currencies Usd/Eur Usd/Eur Ars/Usd Ars/Eur Expiry dates Jan -Feb 12 Jan -Feb 12 Jan -Feb 12 Jan -Dec 12 Jan-Feb 12 Jan-Feb 12 Jan 12 Jan-Feb 12 Jan-Nov 12 Eur/Usd Cny/Eur Inr/Usd Jan 12 Jan 12 Jan-Feb 12 Jan-Nov 12 Elettronica Santerno Turbo Gears Fon Carraro China Usd/Eur Inr/Eur Cny/Usd Cny/Eur Apr 12 -Mar 13 Usd/Eur Eur/Rub Eur/Brl Jun 12 Mar 12 Mar 12 Jan -Dec 12 Jan -Nov 12 Inr/Eur Pln/Eur Cny/Eur Jan -Mar 12 Feb 12 Jan -Feb 12 CONSOLIDATED FINANCIAL STATEMENTS 177

179 C. Fair value Carraro Spa Carraro Drive Tech Carraro Argentina Carraro India Carraro Elettronica International Santerno Turbo Gears Fon Carraro China Group Total 31/12/2011 Group Total 31/12/2010 Swap (DCS) ,621 Swap (DCS) Total ,640 1 Instruments hedging foreign currency sales budget. 2 Instruments hedging imbalances of current receivables and payables in foreign currencies. D. Details of fair values Cash Flow Hedge Positive Fair value 31/12/ /12/2010 Negative Fair value Positive Fair value Negative Fair value Exchange rate risk - Domestic Currency Swap 1,195 1,887 2, E. Summary of fair values recognised before tax effect according to their accounting treatment FV recognised in the income statement FV recognised in net equity Carraro Spa Carraro Drive Tech Carraro Argentina Carraro India Carraro Elettronica Int. Santerno Turbo Gears Fon Carraro China Group Total 31/12/2011 Group Total 31/12/ , ,340 Total ,640 In relation to the positioning in the hierarchy of fair values pursuant to Ifrs 7 par. 27 the financial instruments described are classifiable as level 2; there were no transfers of level during the period. The fair values as at 31/12/2011 of financial instruments on exchange rates were calculated using the forward exchange rate method. The counterparties with which the contracts are stipulated are leading national and international banking institutions. The financial instruments on currencies are used, on a basis consistent with the financial risk management policy adopted by the Group, to hedge the risks deriving from exchange rate fluctuations and concern sales volumes compared with the budget exchange rate and the collections and payment of short and medium-term receivables and payables with respect to the historical value. For accounting purposes in relation to contracts hedging sales budgets in foreign 178 ANNUAL REPORT 2011

180 currencies effective at the reporting date, it should be noted that for the transactions executed, especially Domestic Currency Swaps, and in accordance with all the conditions provided by the Ias/Ifrs standards, hedge accounting was applied with reference to the type of cash flow hedge. Consequently, the corresponding changes in fair values are reflected in a shareholders equity reserve, net of the tax effect. 9.3 Derivative financial instruments on interest rates A. Notional values and fair values The table shows the details of the notional and fair values and other information regarding the various types of derivative contracts on interest rates in existence as at 31 December 2011; on this date the ongoing contracts involved exclusively Carraro International Sa. Contract Currency Expiry Notional 31/12/2011 Notional 31/12/2010 Fair Value 31/12/2011 Fair Value 31/12/2010 Interest Rate Swap Eur 29/05/ Interest Rate Swap Eur 29/05/ Interest Rate Swap Eur 29/05/ Interest Rate Swap Eur 29/05/ Interest Rate Swap Eur 29/05/ Interest Rate Swap Eur 31/03/ Interest Rate Swap Eur 30/06/ ,500 10, Total derivatives from cash flow hedge 17,757 26, In relation to the positioning in the hierarchy of fair values pursuant to Ifrs 7 par. 27 the financial instruments described are classifiable as level 2; there were no transfers of level during the period. For determination of the fair value of Interest Rate Swaps the discounted cash flow method was applied. B. Details of the effects recognised in the income statement are presented in the general summary table in paragraph 9.1. above. Sensitivity analysis The table below shows the economic and equity effects generated by the financial statements assets and liabilities (as at and respectively), in the event of sudden changes in the following market variables: main foreign currencies with respect to the euro: +/- 10% interest rates: +100/-50 basis points in 2011 and +100/-50 basis points in CONSOLIDATED FINANCIAL STATEMENTS 179

181 The interest rate oscillation bands represent the average expectations of maximum change that the markets currently express. The following methods were used: for Interest Rate Swaps the discounted cash flow method was applied; Domestic Currency Swap contracts were calculated using the forward exchange rate method; The exchange-rate risks deriving from translation of the financial statements of foreign subsidiaries from local currency into euro were not considered. Balances at 31/12/2011 INTEREST RATE RISK INTEREST RATE RISK Assets Effect on Income Effect on Equity +1% 0,5% +10% 10% Effect on Income Effect on Equity Effect on Income Effect on Equity Effect on Income Trade receivables 2,012 1,698 Other fin. ass. / derivatives on currencies Other fin. ass. / derivatives on interest rates Effect on Equity 1,380 5, ,454 Loans Cash and cash equivalents Total gross effect ,394 5,404 3,280 5,454 Taxes (27.50%) ,208 1, ,500 Total net effect ,186 3,918 2,378 3,954 Liabilities Trade payables 9,005 8,833 Loans 1, ,935 1,896 Total gross effect 1, ,070 6,937 Taxes (27.50%) ,944 1,908 Total net effect 1, ,126 5,029 Total 1, ,312 3,918 7,407 3,954 Balances at 31/12/2010 INTEREST RATE RISK INTEREST RATE RISK Assets Effect on Income Effect on Equity +1% 0,5% +10% 10% Effect on Income Effect on Equity Effect on Income Effect on Equity Effect on Income Trade receivables 1,393 1,257 Other fin. ass. / derivatives on currencies Other fin. ass. / derivatives on interest rates Effect on Equity 235 7, ,339 Loans 822 1,005 Cash and cash equivalents Total gross effect , , ANNUAL REPORT 2011

182 Balances at 31/12/2010 INTEREST RATE RISK INTEREST RATE RISK Effect on Income Effect on Equity +1% 0,5% +10% 10% Effect on Income Effect on Equity Effect on Income Effect on Equity Effect on Income Effect on Equity Taxes (27.50%) , ,568 Total net effect , ,771 Liabilities Trade payables 2,906 2,820 Loans 2,280 1, Total gross effect 2,280 1,140 2,847 2,901 Taxes (27.50%) Total net effect 1, ,064 2,103 Total 1, ,570 5,662 2,232 6,771 Positive sign: income (economic) increase (equity) Negative sign: expense (economic) decrease (equity) There were no significant events such as to have any effect on the financial statements and the related disclosures. 10. Events subsequent to the reporting date The Carraro Group financial statements are audited, up to the year ending 31 December 2015, by PricewaterhouseCoopers Spa. The fees accruing to the financial year, for auditing and other services, paid to PricewaterhouseCoopers Spa are summarised below. Accounting audit Carraro Spa Subsidiary companies Total independent auditing services Other services Carraro Spa Subsidiary companies Total other services Total fees 1, Information in accordance with article 149-duodecies of the Consob Issuers Regulations CONSOLIDATED FINANCIAL STATEMENTS 181

183 EQUITY INVESTMENTS HELD BY DIRECTORS, STATUTORY AUDITORS AND GENERAL MANAGERS AND IMMEDIATE FAMILY MEMBERS Name and surname Subsidiary company: Carraro Spa N of shares held as at 31/12/2010 N of shares purchased N of shares sold N of shares held as at 31/12/2011 Mario Carraro Directly held 1,903,250 1,903,250 through Finaid Spa 26,775,564 26,775,564 Francesco Carraro Directly held 1,182,395 1,182,395 Chiara Alessandri Directly held 20,000 20,000 Alexander Josef Bossard Directly held 6,000 4,000 10,000 Antonio Cortellazzo Directly held 29,000 37,500 29,000 37,500 MARIO CARRARO Chairman 182 ANNUAL REPORT 2011

184 CERTIFICATION OF THE CONSOLIDATED FINANCIAL STATEMENTS FOR THE YEAR PURSUANT TO ART. 154-BIS, SUBSECTION 5 OF LEG. DEC. 58/1998 (CONSOLIDATED FINANCE ACT) AND ARTICLE 81-TER OF CONSOB REGULATION NO OF 14 MAY 1999 AS AMENDED. 1. The undersigned Alexander Bossard, Chief Executive Officer, and Enrico Gomiero, Director Responsible for producing the company s accounting documents of Carraro Spa, taking into account also the provisions of Art. 154-bis, paragraphs 3 and 4, of Legislative Decree 58 of 24 February 1998, certify: the adequacy in relation to the characteristics of the enterprise; the effective application of the administrative and accounting procedures used to prepare the consolidated financial statements for 2011; 2. In this regard no significant aspects emerged which require disclosure. 3. We can also certify that: 3.1 the consolidated financial statements: were prepared in conformity with the applicable international accounting standards endorsed by the European Community under the terms of Regulation (EC) N 1606/2002 of the European Parliament and Council, of July 19, 2002; correspond to the figures in the accounting documents and books; give a true and fair picture of the economic, financial and equity position of the Group and of all the companies included in the consolidation; 3.2 the report on operations includes a reliable analysis of the progress and results of operations, as well as the situation of the issuer and of the set of companies included in the consolidation, together with a description of the key risks and uncertainties they are exposed to. Date: 15 March 2012 ALEXANDER BOSSARD Chief Executive Officer ENRICO GOMIERO The Director Responsible for Producing the Company s Accounting Documents CONSOLIDATED FINANCIAL STATEMENTS 183

185 184 ANNUAL REPORT 2011

186 REPORT OF THE BOARD OF STATUTORY AUDITORS TO THE MEETING OF THE SHAREHOLDERS WITH REGARD TO THE CONSOLIDATED FINANCIAL STATEMENTS Dear Shareholders, in performing the tasks entrusted to us, and with regard to the consolidated financial statements of the Carraro Group as of 31/12/2011, we acknowledge the following: with regard to monitoring activities carried out during the 2011 fiscal year, we make reference to our report on the financial statement of the parent company Carraro Spa; we did, however, become familiar with and monitor, within our area of responsibility, the sufficiency of the Company s organisational structure and the respecting of the principles of proper management by making direct observations, by collecting information from the pertinent responsible parties in administrative positions, and by meeting periodically with the outside auditors and with members of the boards of auditors of the Italian subsidiaries for the purpose of reciprocal exchange of data and relevant information; in accordance with the terms of law, we received the consolidated financial statements from the Board of Directors, along with the related report on management; we verified compliance with the laws governing the consolidated financial statements and the report on management and took note of the outside auditors report on the consolidated financial statements of the Carraro Group, which contains an opinion without qualifications or requests for further information. The aforementioned consolidated financial statements was prepared in accordance with the international accounting standards Ias/Ifrs issued by the International Accounting Standards Board (Iasb), in conformity with the provisions of Legislative Decree of 28 February 2005, No. 38, enacted pursuant to Regulation (EC) No 1606/2002 of the European Parliament and of the Council of 19 July The Board of Statutory Auditors reviewed the criteria adopted for creation of the consolidated financial statements, particularly with regard to the area of consolidation and to the uniformity of application of the aforementioned accounting principles, and the controls carried out enabled assurance that the applicable procedures adhered to the laws in force. In our opinion, the consolidated financial statements in its entirety correctly depicts the asset and financial situation and the economic results of the Carraro Group for the fiscal year that closed on 31 December 2011, in conformity with the aforementioned laws governing the consolidated financial statements. The Board also notes that the report on management of the Group is correct and consistent with the consolidated financial statements. Campodarsego, 29 March 2012 THE BOARD OF STATUTORY AUDITORS Luigi Basso Saverio Bozzolan Roberto Saccomani REPORTS 185

187 AUDITORS REPORT IN ACCORDANCE WITH ARTICLES 14 AND 16 OF LEGISLATIVE DECREE NO. 39 OF 27 JANUARY ANNUAL REPORT 2011

188 REPORTS 187

189 ORDINARY SHAREHOLDERS MEETING OF CARRARO SPA OF 20 APRIL 2012 Chairman: Mario Carraro Shareholders present: 29 shareholders in person or by proxy representing % of total share capital amounting to 45,989,800 ordinary shares with voting rights. The Ordinary Shareholders Meeting approved: the Financial Statements as at 31/12/2011, the Board of Directors Report and allocation of 2011 earnings as follows: Euro 302,708 to the Legal Reserve and Euro 5,751,460 to the Extraordinary Reserve; The report on the Remuneration Policy for Directors and Senior Managers and the procedures used for adoption and implementation of said policy; Appointment of the new Board of Directors in place of the outgoing board due to expiry of term of office: the Board of Directors will consist of 9 members and will serve for three years until approval of the Financial Statements for The following members of the Board of Directors were appointed Enrico Carraro, Chairman Tomaso Carraro Francesco Carraro Alexander Josef Bossard Arnaldo Camuffo Antonio Cortellazzo Gabriele Del Torchio Marina Pittini Marco Reboa Directors Remuneration for the year 2012, establishing the same as Euro 50,000 for each Board Member and establishing the total amount as Euro 3,050,000 per year, valid until the date of the approval of the financial statements for 2012, for remuneration to be allocated to members of the Board of Directors with special duties, including the Chairman, the Deputy Chairman and the Chief Executive Officer, assigning the Board of Directors the faculty to allocate such amount among its members; 188 ANNUAL REPORT 2011

190 Appointment of the new Board of Statutory Auditors in place of the outgoing board due to expiry of term of office. The Board of Statutory Auditors will consist of three members plus two alternates and will serve for three years until approval of the Financial Statements for The following were appointed members of the Board of Statutory Auditors Roberto Saccomani, Standing Auditor, Chairman Saverio Bozzolan, Standing Auditor, Marina Manna, Standing Auditor, Barbara Cantoni, Alternate Auditor Stefania Centorbi, Alternate Auditor The Remuneration of Standing Auditors for 2012 establishing the same as Euro 55,000 for the Chairman and Euro 35,000 for the other Standing Auditors; A program of acquisition and disposal of own shares amounting to no more than 10% of share capital, for a period of 18 months, which provides: A price for the purchase of each common share not less than, at the minimum, 30% and, at the maximum, 20% below the reference price of the share on the stock market on the day preceding each individual transaction. A price for the sale of each common share not less than, at the minimum, 20% below and, at the maximum, not more than 20% above the reference price of the share on the stock market on the day preceding each individual transaction. REPORTS 189

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192 Design BUNKER [ Typeset in AMPLITUDE [Christian Schwartz, 2003] MILLER [Matthew Carter, 2002] Print GRC [Modena] REPORTS 191

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